The Dangers of Debt

By Keith Fevurly, IAR, Integra Financial, Inc.

The Dangers of Debt

According to a survey conducted by the Harris Poll as commissioned by the online website, Nerd Wallet, U.S. household debt increased to an all-time high of $13.95 trillion at the end of 2019. This debt includes mortgages, home equity lines of credit, automobile loans, student loans, credit cards, and other household debt. The average U.S. household with revolving credit card debt has an estimated average balance of $6,849 and pays annual interest of over $1,100. So how long does it take to pay off this average balance if making only the card’s minimum monthly payments of $20 per month at a prevailing annual percentage rate (APR) of 19%? If you compute this answer on a financial function calculator, a "no solution" is found, meaning that the number of monthly payments is so large that you will never get out of debt!

Even with a relatively modest average credit card balance of $1,000, it will take the borrower almost 100 months or 8.33 years to pay off the card. And the 19% APR is the rate charged for a borrower with a good credit score; those with a poor score pay an even higher rate, sometimes exceeding 30%!

Therefore, it is critical that a good consumer and investor properly manage debt. Accordingly, here are some good rules of debt management to follow:

  1. If at all possible, pay off credit card debt in full each month. Better yet, do not charge any expense on your credit card for which you can afford to pay cash!!
  2. Use credit cards only for convenience (to move money from one month to the next, making the card an interest free loan).
  3. With respect to credit cards (and as "a convenience-user" only), shop for a card with the lowest APR and the longest "grace period" possible. Moreover, only keep one general-purpose credit card (such as Visa or Master Card) in your purse or wallet at any time.
  4. Use a debit card for purchases instead of a credit card.
  5. Only incur debt on a purchase or investment if the asset purchased is likely to exceed (the annual investment return) the cost of the debt. For example, if a stock is expected to appreciate at 10 percent, and the interest charged on money used to purchase this stock is only 5 percent, it is preferable to make the purchase. Better yet, buy the stock using a cash account only.
  6. Only use debt to buy assets that are expected to appreciate in value and not depreciate. For example, it is preferable to incur mortgage debt on real estate in most areas of the country, but it is generally inadvisable to purchase an automobile using debt, since the automobile is exceedingly likely to depreciate over time!
  7. Save for the expenses of higher education for your children or grandchildren so as not to have them incur student loan debt.
  8. Finally, before retiring, pay off existing mortgage debt. It will do "wonders" for your retirement income cash flow!


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