One of the things that keep most American awake at night is not necessarily an uncomfortable bed or incessant nightmares. On the contrary, the reason why many Americans can not sleep is because of the mountain of debts facing them.
Many Americans are deep in all kinds of debt ranging from payday loans down, mortgages, loans from traditional banks, as well as credit card debt. According to data from the Federal Reserve Bank, the reported amount of household debt in the United States is $14.56 trillion in 2020. This is way higher than the $414 billion recorded in the first quarter of 2019.
By the end of 2020, the US household debt has reached a 10 year all-time high of $92,727. This statistic is disturbing and shows that there is an increase in debt owed by Americans. However, not all debts are bad. There is good debt as well as bad debt. Knowing the difference would help you make the right decision and remain financially afloat.
Good Debt Vs Bad Debt
Debt can be good or bad. What makes debt good or bad is dependent on its impact on your finances in the long run. For example, if your debt increases your possibility to earn higher in the future, then it can be considered good debt. Some of the debt that falls into this category includes:
- Student loans
- Mortgage
- Loan for the purchase of commercial vehicles
- A loan is taken out to start a business
All of these increase the borrower’s capacity to earn more income in the long run.
On the other hand, bad debt is a total liability in its entirety as it puts additional stress on the borrower to pay back without being able to generate more funds in the future. Examples of such loans include car loans for personal use, taking out a loan to pay rent, buying clothes and shoes for personal use, and a loan for vacation.
You must however note that too much debt is and no matter what type it is. It is therefore ideal to reduce the level of debt to the barest minimum if it can not be avoided.
Signs that Indicate you have a Debt Problem
There are some notable signs to look out for if you are in debt. These signs most times indicate that you are experiencing difficulties in managing your debt. They include:
#1. Not Knowing how much you Owe
If your debt has gotten to the point where you cannot rightly say exactly how much you owe, then you are having a debt problem. In that case, seeking expert advice may be the right thing to do.
#2. You Owe more than you Earn
Owing more than you earn is a sure indication of a looming debt crisis. What happens is that you will spend all your income servicing debt and may end up borrowing more to make ends meet. The result is a never-ending debt cycle.
#3. You Borrow to Pay Debt
Borrowing to pay off your debts from different sources such as a payday loan, credit card debts, and others shows that you are experiencing money issues. If not properly managed, you will run out of options and find it difficult to pay back these loans.
Conclusion
Borrowing especially to take care of personal needs is a bad debt that should be avoided. It not only adds money stress to you, but it also prevents you from achieving your financial goals speedily.
