Credit Card Debt
Credit card debt is the most dangerous type of debt. The use is typically for consumer goods (think electronics, furniture, etc.). Consumer goods depreciate (lose value) over time.
Also, credit cards provide the ability to over-spend regardless if you have money in your checking account to cover the purchase.
When someone pulls out a credit card and swipes it at the register, the only way that purchase doesn’t go through is if the credit limit for that card has been reached. This is set by the credit card company and is based on your credit score and history.
The credit card used for that purchase does not consider how much money is in the checking account that will be used to pay for the purchase. This allows people to overspend and carry a credit card balance month-to-month.
Carrying a credit card balance month-to-month is a poor financial decision. The interest rates on credit cards is typically 15% to 25% which is an outrageous amount to pay and keeps people in debt for long periods of time.
Buying depreciating assets (consumer goods), the ability to overspend, and high interest rates all lead to the conclusion that credit cards are useful but can be dangerous.
Using a credit card provides benefits (savings, cash back, airline miles, etc.) but please pay off the balance at the end of each month. Your net worth begs you to.
For full transparency, my wife and I use credit cards mainly for the benefits or perks. We also pay off our balance, in full, every single month.
An education is the most tried and true method of earning a higher income. By all means, further your education. However, try to find the most efficient and cost effective way to pay for the education.
Most likely student loans will be unavoidable. While in school people should try to reduce the borrowed amount and after graduating should try to pay down the debt as quickly and effectively as possible.
Let’s assume that you have student loan debt. Most federally issued student loans have interest rates between 5% and 10%. While these rates are not as high as credit cards, the rates are still substantial enough to focus on paying them down. Reducing this student loan debt will reduce your liabilities and increase your net worth.
The purpose of a mortgage is to purchase property. The mortgage grants the ability to pay for property over a fixed term (15 or 30 years). This allows the purchase of a property (hundreds of thousands of dollars) with relatively little money down (as low as 3.5% with an Federal Housing Authority (FHA) loan).
Mortgage interest rates are currently very low (3% to 4%). However, paying down the mortgage will reduce your liabilities and increase your net worth.