Credit and Debt

To Begin

The two are the same thing seen from different sides: if I loan you something I have given you credit and you are in debt.

For practical purposes we'll speak from the point of view of the consumer and not of the lender.

Credit

Credit is basically how much they'll extend to you if you want it. You don't even have to take them up on the offer, the offer is just that you're trustworthy (or not) and they'll lend you X if you'd like.

There's a few layers of credit relating to how long they last:

• Short term things like credit cards

• Medium term things like car loans and lines of credit

• Long term things like mortgages

Straightforward.

Credit Cards

On the whole, I like credit cards.

The advantage of a credit card vs a debit card is that you often get cash back benefits, perks like free rentals or insurances or airport lounges etc. and fraud protection, so if someone skims your card and drains your account, Mastercard says "no worries" but your bank won't.

They also effect your credit score nicely if used properly.

So they're giving you free benefits and security, what's the catch?

They make money in two ways:

• Every time you swipe at a store, that store gives a small amount to the credit card company as a fee.

• They're hoping you can't control yourself and rack up a big debt which they can charge interest on.

The first doesn't really matter to you as a buyer, other than the minor inflation of good's prices to compensate (or policies like minimum purchase amounts) that you'd be paying for anyway if it was cash or debit. It's just a tiny invisible price increase across the board for stuff you buy.

The second is a big deal, because personal debt - and especially credit card debt - is some of the worst things you can get into short of loan sharks with a baseball bat aimed at your kneecaps.

Credit card interest rates will be ~20% a year or so, depending on the type of card you have.

They will have a minimum payment per month which doesn't matter because your entire goal is to pay the entire thing off every time.

I treat, as we all should, a credit card like a debit: if I know my bank account can't cover the purchase, I can't buy it. A credit card is never to be used to get access to money you don't have.

In the event that you need emergency money, there's this:

Personal Lines of Credit

A Line of Credit (LOC) is a loan that you get typically from a bank and it's just a service they offer as banks do to their account holders.

I've never used mine, but I've had one sitting there available for years - it's up to $10k and I think the rate is something like 5-7% interest which is clearly much nicer than 20%.

If you aren't familiar with how interest rates stack up, play with a calculator and change the percentage even one or two up to see how the total changes drastically.

You don't want to be paying more interest than you need to. It's a powerful magic.

The other good news, is sometimes you can roll credit card debt into a line of credit and lower the interest rates. Talk to your bank about this. If you're sitting on $10k in CC debt at 20% a year, that's quite a mountain. If you could instead sit on $10k at 7% a year, you just saved thousands without doing much except stepping up and taking control of your finances. Definitely look into it.

Car Loans

Car loans these days are getting longer and scarier.

In Canada half of new car loans are 7 years or longer.

There's a few reasons for this:

• Car buyers are increasingly broke, but still want to purchase expensive cars, and stretching them makes the monthly payment lower

• The interest rates have been low, so what's the big deal?

• Dealerships / lenders LOVE to give you longer loans because they make more interest

The problem, of course, is that the overall cost goes up for you.

If you buy a $40,000 car here's how it shakes out

Interest Rate	Years paying	Monthly payment	Total cost
3%	4 years	$885	$42,500
3%	7 years	$528	$44,400
3%	8 years	$469	$45,100
4%	8 years	$488	$46,800
5%	8 years	$506	$48,614

...and so on. You can see how it seems attractive, paying less per month is everyone's main goal - this is how a lot of car finance pitches work once they sit you down in the manager's office.

But you can also see how you end up spending thousands of dollars more for the same car in the end, over 10% of the car's original price in most cases.

"I don't want to pay highly monthly payments OR a lot of extra interest!" you say. Well, gotta find a cheaper car to purchase.

Let's talk more about cars specifically on its own page.

Mortgages

Typically the longest form of debt you can take on, a mortgage is going to roll you for decades and generally used for houses. I've never gotten a mortgage so I actually don't know much about the interior processes.

I do know that floating interest rates are sort of scary depending on your view of the economy's future. Go watch The Big Short again for an entertaining primer to this, but basically the story is just what the car loan chart says above: people were buying big houses with terrible credit scores at low interest rates, but then the interest rate went up and suddenly an easy payment became a hard payment and a lot of people were run out of their houses as it all foreclosed and collapsed on them.

So, I'm not qualified to offer advice here. Go read some books.

Student Loans

In similar Big Short-esque fashion, the US and other countries are facing a terrifying student loan crisis. Staggering numbers of the debt owed, of the people who aren't / can't pay them back, stories of people paying the minimum payment on a $20,000 loan for a decade and ending up at... $19,500 owing. It's scary. I paid mine off as soon as possible because of the investing return rate thing - super aggressive saving until I became debt free.