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Why Consumer Debt is Worse Than Non-Consumer Debt

I should start by explaining (what I see as) the difference between consumer and non-consumer debt. Consumer debt includes: credit cards, financed appliances/furniture/gadgets/etc, and car loans. It’s debt for items that are meant to be used up and worn out. Non-consumer debt, in my book, is mortgages and student loans (or business loans, but it’s best if you don’t get loans for your business in your own name). Housing and education aren’t really things you wear out. They’re also lifetime investments.

So why is having consumer debt worse than having non-consumer debt? My definition gives away what I think is the biggest reason non-consumer debt is part of a lifetime investment. The other things may be investments in your life as well, but they’re often things that you can also buy without getting into debt.

Other reasons that come to mind why consumer debt is worse are:

1. They reflect irresponsiblity. This isn’t to say you can’t also be irresponsible with a mortgage or a student loan, but a person’s level of consumer debt often reflects their level of financial responsiblity.

For example, when we got married Micah had less than $850 in credit card debt (much of which was for our wedding bands, which I’d told him I’d pay for), and a pretty reasonable car loan on a sensible car. He had a lot of student loan debt, but his consumer debt reflected that he was, on the whole, used to living within his means.

2. Consumer debt often has higher interest rates. One of the downsides of consumer debt is that it often has higher interest rates. Higher interest rates mean you’re paying significantly more than the item actually cost. Even worse, credit card interest rates can skyrocket if you’re late on a payment, if you mess up financially in another area, or just because the company decides to change your rate.

3. Consumer purchases depreciate faster. One big reason not to buy a new car is that it’ll drop in value the moment it’s driven off the lot. Most purchases will lose value quickly, so that you could not recoup the loan by selling the item. If you’re just making minimum payments, your iPod may die before you’ve paid it off.

Houses and educations can also depreciate, but if you stay on top of your field or keep your house in good condition, then the initial purchase retains its value.

On the Other Hand

1. Debt is debt is debt. is debt. It limits your financial future, since part of your paycheck is always going to pay it off. Plus, the interest on long-term debts like mortgages and student loans can actually cost you a lot more than higher interest on smaller loans.

2. Student loans and mortgages can be acquired quite irresponsibly. Subprime mortgages, anyone? Student loans used to finance a fancy car?

Just because they have the potential to be lifetime investments doesn’t mean you should get more of a loan than you need or can afford. Instead of being a tool for your future, they become a ball and chain.

Do you believe there are better and worse types of debt? Are there kinds one should avoid entirely?


Four Pillars May 4, 2009 at 7:50 am

Thanks for the link.

I agree with your assessment of debt – something like student debt can be a grey area. Excessive student debt isn’t necessarily any different than consumer debt since the future income of the student probably won’t support it.

It’s hard to draw the line though with student debt.

Miranda May 4, 2009 at 9:10 am

I like this post. Sometimes there really is a difference between types of debt. I agree that consumer debt is worse than some of the other types of debt. However, it is important not to get too carried away. Even with mortgages and student loans, it is a good idea to borrow as little as you can.

Miranda’s last blog post: What Happens When a Big Bank Fails?

SavingDiva May 4, 2009 at 9:43 am

I’m glad to see that your post does point out the irresponsibility attached to some student loans and mortgages.

SavingDiva’s last blog post: Is debt a deal breaker?

Writer Dad May 4, 2009 at 10:12 am

I TOTALLY agree. Consumer debt is the worst. It does often reflect irresponsibility and stuff we don’t need depreciates faster than it should. Like an erosion of karma for stuff we knew we shouldn’t have bought in the first place.

Writer Dad’s last blog post: 7 Steps to Squeaky Clean Copy

Meg from FruWiki May 4, 2009 at 10:35 am

You know, I used to think there was hard line between the two, but there isn’t. And not just because people often roll various other expenses into mortgages and student loans — or because sometimes it does make good sense to put something very important on a credit card if you don’t have enough savings.

Like you said, people take out mortgages and student loans irresponsibly, too. I think a lot of people justify spending more than they can afford on a house or on their education because it’s “an investment”.

For example, I was watching some show on rising college costs and there was this one lady who was going to Harvard to become a social worker — and paying a king’s ransom for it, which then went into student loans. But it was Harvard and such an honor to be even accepted.

When she finally ran the numbers, she realized that there was no way she could afford to pay off her student loans in the career she chose. But of course, student loan companies don’t care because they know that you can’t bankrupt student loans!

Likewise, the old advice on buying houses — which my husband and I thankfully ignored — was “buy as much house as you can afford”. Yes, we really had otherwise smart and very caring people we love tell us this! The idea is that your income will keep going up as you get raises but your mortgage will stay the same. Plus, your house value will keep going up and up and up, making it a great investment.

As we’ve seen, homes as secure investments were overrated. And sometimes it even makes better sense to rent. But again, people often don’t do the numbers and realize they can’t afford their home until they’re headed into foreclosure.

Studies about credit card use have shown that people tend to spend significantly more when using credit cards instead of cash. I think the same is true with mortgages and student loans — but worse because they have little to no stigma about them. People need to stop seeing them as easy, safe investments (there’s no such thing) and start running the numbers for themselves BEFORE taking on ANY debt.

Meg from FruWiki’s last blog post: Experimentation

Kristy @ Master Your Card May 4, 2009 at 4:11 pm

I’m of the opinion that debt is debt is debt and none is necessarily better than the other. However, I believe that people should consider all of their options prior to taking on debt and ensure that they are making the most financially responsible decision available to them. Debt can be a tool, just like money. I don’t advocate getting into debt for “stuff,” but I don’t think having a mortgage you can’t afford or student loans are any better. The difference is in how people handle their responsibilities and how they choose to pay their debts.

Kristy @ Master Your Card’s last blog post: Financial Maxims: In Your 30s

Stacey May 4, 2009 at 8:58 pm

I WAS going to say that there is a difference between consumer and non-consumer debt… but then I realized that we paid our student loans off really quickly, and are now attacking the mortgage with the ferocity that some attack credit card debt.

Actions speak louder than words, no?

I will point out that most non-consumer debt has a potential tax benefit. But as I pointed out to a few friends, who wants to pay $1000 in mortgage interest to get $150 back? It’s just not good math!

Coupon Artist May 4, 2009 at 10:48 pm

I think any kind of debt is bad because it all breeds more debt. If you can’t afford your mortgage and/or student loan payments, then what do you do? Not pay them and ruin your credit, or pay them and have no cash left and have to turn to credit cards. Once you get started paying interest on money in any form, your money doesn’t go as far and it becomes harder to survive without debt. Its a vicious cycle. Of course, some debt like a mortgage may be unavoidable, but I am still a huge proponent of paying it down ASAP so that your money is yours again.

Coupon Artist’s last blog post: Why do People Wait So Long to Ask for Help?

Lefty May 6, 2009 at 5:59 pm

What about medical debt? That is the only debt I have right now from a recent cancer treatment. I’m lucky that the hospital is not charging interest. Is this a gray area?

Lefty’s last blog post: Financial Structure

mrsmicah May 6, 2009 at 9:42 pm

@Four Pillars @Miranda yeah, student loans are tough. On the one hand, you can choose to go to a different school. On the other, education is valuable for the future. I’ll be writing more about that later.

@Saving Diva I think they get a free pass too often, despite being the hardest kind of debt to get out of.

@Writer Dad so true. We mortgage our future to pay for stuff that may not even be around then!

@Meg That happens the more I think about it too. If the woman in your example had had full tuition scholarships, or planned to teach, it might make sense–but yeah, you can be a good social worker with a degree from lots of decent schools, even state schools.

@Kristy It’s a particularly valuable tool when it’s for something that one couldn’t reasonably afford up front. But, as you say, the key is knowing when it’s something you can’t afford at all.

@Stacey Yep, bad math! The deduction is a nice one, but not a good financial plan.

@Coupon Artist Very true. The less debt you have, the fewer expenses you have and the easier it is when you get in tight spots!

@Lefty I’d say that doesn’t count as consumer debt. It’s probably even more respectable than mortgages or student loans, since it was incurred to save your life–which is the best reason to get into debt I can think of! Best wishes on a speedy and complete recovery from the cancer and the debt.

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