Money on its own is said to be worthless. It is us who have assigned numbers to these papers, so that we can exchange it for general goods. Buying is what gives money its value. Otherwise it’s intrinsic value is nil.
In this post we won't be talking about ethics of buying.
Neither are we going to determine the value of money.
The old saying of don't jump higher than your roof, is completely correct. For, if you do, then paying the penalty is inevitable.
So let’s start with a systematic approach.
How much credit do you actually need:
We all need a house. This is a moral fact. Living on rent for the whole life is no one’s story of achievement.
So the practical solution is to take out a mortgage loan.
A decent house in the porsche estates in cities like Washington, New York, Boston or say Orange county, California, would make you land into a mortgage interest of roughly $200,000. Which is not a joke!
It is completely upto you how you are going to utilize the word credit. Taking out loans and using credit cards help us to complete our unfinished dreams. But little do we know of the hidden costs encompassed by credits.
There are in general four forms of credit:
- Auto loan
- Student loan
- Credit cards and retail cards
While for many, another addition would be payday loans.
For any average American 3 forms of credit are technically common: Mortgage loan, auto loan and credit cards. Opting out student loan for the moment.
Avoiding credits with high interest rates:
It is always better to maintain a good credit score.
With good credit score, you will get the best interest rates on your credit accounts. So, before you apply for any new credit cards or loans, do your rate shopping in a systematic order.
Try to avoid as much hard inquiries as possible. They can drop down your credit score to some extent.
With better credit score, there are chances that you will have good interest rates. On top of that, if you can minimize your total number of credits, you are the winner.
How much will debt cost you over your lifetime will be determined from the interest rates circulating your accounts.
It is a very grave reminder, if you ever look to your mortgage payment history. You will see, in a normal 15 years or 30 years of home loan plan, the first few years of your monthly payments is done for satisfying your interest payments. After which your ratio towards the actual home loan amount increases, reaching max in the last monthly payment.
There is no way you can evade the cost for what you borrow. So your worry should be, how to borrow less, and how to pay less for that.
Selecting credits intelligently:
Half of the average Americans are owing to unnecessary debts. The main reason is their credit cards.
Especially college goers, who have little knowledge of debt and credits, fall prey to the trap of these cards.
Students are more prone to start a career with bad credit. Credit cards get you closer to what you want, of which, you are barely aware of the hidden cost. If you don't do your payments on a regular basis, your debt amount can increase to red, within a short span of time.
So the $100 you owe today, with delayed payments might reach $500. This is how your debt accumulation starts.
It is therefore clever of you to cut credit card usage when you can do with cash.
In our nation, one can just not survive without a mortgage loan and auto loan. These two are like few of those basic necessities for them who can’t afford to buy these things with complete down payment.
Even though the loans are what you need, they are like devils you are welcoming. The sum of interest for these two loan accounts is the maximum of what you will owe in your lifetime.
This is where you start owing more than $200,000 in your lifetime.
You cannot lessen your auto loan or home loan, what you can do is reducing your number of unsecured credit cards.
How Much Will Debt Cost You Over Your Lifetime and what you can do about it:
Your lifetime cost of debt will be somewhat between $150K to $200K, if you live in an average decent city in US.
These 3 are the eye-catchers. Next comes your credit cards.
So, even if you maintain an excellent credit score and have all the basic forms of credit including credit cards, it is likely you will end up paying roughly $150K in total.
Basically you can do nothing about this. You are the borrower and you are at risk.
All we can do is follow these 3 steps, as you are not the only facing debt problems, more or less we all are:
- Avoid too many credits that you can't handle and learn to manage money
- Maintain a good credit score
- Avoid too many hard inquiries on your credit report