"The only reason a great many American families don't own an elephant is that they have never been offered an elephant for a dollar down and easy weekly payments."
Checking the mail, I notice another letter from a credit card company. I know there’s not a credit card inside because it’s too light. I open it up to see a rejection. I can’t get a credit card, not because I have bad credit, but because I have no credit. It’s frustrating for me because I’m caught in a loop; I can’t get a credit card because I don’t have credit, and I don’t have credit because I can’t get a credit card.
Fast forward a few years and I now have a dozen credit cards. Every time I see a credit card that offers some kind of reward - some kind of cashback or a 0% offer - I apply...and get approved. Before I know it I’m opening credit cards simply to transfer my balances to. Unfortunately, I don’t have the self-control to stop using the card that I just transferred over to the new card. I’m in college going to class full time so there’s always a need for just a little bit more cash.
That was almost 20 years ago, but the lessons are still with me. Credit card companies aren’t your friend; they want to make money from me. Any “perk” that I sought was merely meant to get me to open up (and use) more lines of credit. I was able to escape the debt cycle, but many struggle. Debt is limiting and not something to take lightly.
Different Types of Debt
Debt comes in all shapes and sizes. The more common types of debt that you have are a mortgage, home equity loan (formerly called a second mortgage), car, boat, RV loan, student loan, and credit cards. Some debt, like a car loan, is a one-time transaction where someone gives you money and you agree to pay it back over time with interest. Some debt, like a credit card, where you get a certain limit and you can spend on that limit as you go. Some debt has a fixed interest rate, where the interest rate (effectively, the price of the debt) is fixed and doesn’t change. Some debt has a variable interest rate, where the interest rate changes over time - both up and down.
In the past, debt has been used as a way for young people to smooth their consumption over time - that is, when they come out of college they don’t make much money but their salary will rise over time. Consumption-smoothing helps people buy things now when they don’t have a lot of money and pay it back over time when they have the money to pay it back. That has evolved with the rise of consumerism to allow people to acquire things they can’t afford.
For this post, I’ll mostly be referring to credit cards, but most of what I talk about applies to all forms of debt.