You don’t have to look far to find a financial expert who will tell you that consumer debt is bad. Whether you subscribe to the Dave Ramsey, Suze Orman, or MSN’s MP Dunleavey school of personal finance, you’ve probably heard time and time again how important it is to get rid of debt. But has anyone ever really explained what the problem with consumer debt like credit cards and car loans is?
On the surface, consumer debt doesn’t seem so awful. After all, using these types of credit lines allows you to make major purchases before you’ve saved up the money to pay for them. If your refrigerator breaks down, you can replace it and then pay for it over time. You could so the same with a new car. What could possibly be wrong with this plan?
The problem with consumer debt comes into play when the time comes to repay your debt. The basic characteristics of consumer debt are what make it so dangerous to start racking up debt. If you aren’t careful, the lines of credit that made your life so convenient can suddenly make a mess of your personal finances.
First, paying for purchases on credit make it very easy to overspend. Sure, you know how much you’re spending, but purchasing things on credit just doesn’t hit home the way that spending cash does. Salespeople are too quick to help you find the payment that you can afford rather than helping you focus on your final purchase price. Before you know it you’ve spent $1,000 on a new television when you intended to buy a much more moderate model for around $500.
Paying for the use of those lines of credit is also a common problem with consumer debt. The convenience of buying things before you are able to pay for them in full comes at a price: interest. Just ask anyone who has excessive credit card debt what the worst part of it is, and you’re sure to hear them talk about the high cost of interest charges. By the time you’ve paid off that new car or refrigerator you may have actually paid for it a couple of times when you factor in your interest payments.
Finally, the worst part of consumer debt is the inflexibility it breeds into your monthly cash flow. Families who bring home a decently-sized salary every week usually have enough money to pay their rent and utility payments each month. However, once you factor in the car payments and credit card payments that consumers have committed themselves to making, that decently-sized paycheck doesn’t look so decent anymore. What happens if you lose your job? How will you make all of those monthly payments? Now do you see how having too much consumer debit can weaken your finances?