Is there Good Debt and Bad Debt? What do Both do to you? - (W6:D3) Debt Free Millionaire Podcast

Debt-Free Millionaire

Simplified Explanation: How much do you owe all together? This includes car, home, school and personal loans. Do you owe the utility company for late payments or a credit card? This, all together, is a specific number, weighing you down every minute of every day.

Real Life: Debt is a type of modern-day “indentured servitude”. You work just to pay your bills, even before feeding yourself. When you owe someone money, you always worry about your next payment, cautious of them calling the loan early, or if they will ask you to do something that you don’t exactly want to do, including paying on a month you don’t have the money.

It’s much like welfare. When someone is giving you money, then they control your life, because all they have to do is pull the purse strings and pay you less money, and your whole life is turned upside down. When you make your own money or relinquish your debt, you begin to gain control over your life. No one has power over you when you are debt free.

So, who are the players when you are deep in debt?

1. Credit Card Companies – Credit Cards traditionally have the highest interest rates, around 20%, so their number one task is to get you signed up and spending money. They know that human nature is that you won’t pay that debt on time and will have to pay the high interest rate. They are so determined to get you to sign up for their credit card that they are the #1 producer of spam emails, physical mail, and internet advertising, when you are younger. Go into a Lowes, Home Depot, or most major big box stores and they have someone trying to sell you on their credit card - whether it’s someone walking around the store, or the cashier on the way out, incentivizing you with a discount when you check out. Look at Amazon and Walmart when you check out online; they have these advertisements, too. Then they incentivize you to use their card by giving discounts or flier miles, for your use of the card. They know, at some point, most people won’t pay and instead pay fees and interest.
2. Banks – Most loans are taken out directly from a bank. They have every type of loan you could need, because their #1 job is to find a need and provide a loan for you. They are incentivized to get you to borrow money. If you go into a bank to talk to a banker, most are tasked with asking you to get a loan. The cycle of your money is not to sit in a vault; people save money in the bank, usually at an extremely low interest rate - maybe 1% - then they take those collective funds and sell it to someone who needs a loan, and charge them 9% interest. They then make a consistent 8% interest off that money. For home loans, they borrow money from the Federal Reserve (Fed) for a certain interest rate (in 2022 it was 0-0.25%), and then let you borrow it for a house, paying about 4% (2022). That doesn’t seem like a good return, 4%, does it? But that low interest is what the market calls for. Bank can’t borrow money from the Fed without a good purpose, they must provide a reason to borrow the money. The market in early ‘22, collectively, said that you can borrow for a house at 3.94%, then the banks have to offer you that money at near that interest rate. The banks can’t charge more than the market, or the customer will go somewhere else. With that being the case, they are still making money from your loan and so will offer you the going market rate. To get more details go to www.debt-freemillionaire.com/howbankswork/
3. Credit Bureau – There are three credit bureaus: Equifax, Experian, and Transunion. They are organizations tasked with keeping track of your debt history, and they provide lenders with personal information, credit account history, credit inquiries and public records. Their system provides the history of all your loans, credit cards, and consistent financial activities, when it comes to debt; these also include payment history, from renting, car payments, and even utilities (who can report to them if you don’t pay up). They keep track and report your debt history through a Credit Report, which shows all your loans and their history, the maximum you can borrow, and how much you are borrowing at the time. They track this activity and, through an algorithm (mathematical equation), give you a FICO® credit score, which tells everyone how “responsible” you are with paying back your debt, as well as how much debt you currently have, compared to how much you can draw from. Each bureau has a different way of monitoring your history and scoring it, so their FICO® credit score will be different; but most of the time, they are similar. Different lenders will check different bureaus.
4. Family – If you can help it, never borrow from family. The reason for this is that you don’t want to damage your relationship. If the borrower is slave to the lender, then any strings attached can hurt your relationship - you don’t want that.
5. Bookies – These are people who make loans on activities that you don’t want people to know about, such as gambling, illegal activity, or if you can’t get money anywhere else. If you do not pay up, they will use enforcers (people that will threaten and intimidate you into doing anything to pay them back). It’s never a good idea to do business with someone who doesn’t want to report all their activity to the government!
6. Title Loans or Paycheck Lenders – You will find these lenders in strip malls, or buildings on the corner of lower income areas. If no one else will lend to you, they will lend money on the title of your car, or other personal property, but will charge you extremely high rates. Be cautious if someone is willing to lend easy money - it’s usually at high interest rates and/or will come back to haunt you, if you can’t pay. If you can’t pay it back, you shouldn’t be borrowing it.

So why is debt so bad to have? Think of it this way, the more you borrow, the more you owe; the more you owe, the more stress you have, and the harder you must work to pay it off. If debt was a set of chains wrapped around you, the more debt you gathered, the more chains you would have burdening you down - much like Jacob Marley in Charles Dickens's novel, A Christmas Carol. Those chains were sins of a man, but the representation works just as well as with debt. You are constantly reminded, by the chains and stress you wear, of how much debt you owe, and how much you are burdened by borrowing. Paying off these debts is like taking off those chains. You want the freedom to work to make yourself money, instead of just paying back your debt.

Here are some things that can happen when in debt:

1. High debt can take away freedom – When you are deep in debt, you must make decisions that will pay back that debt. If you want to go on vacation, you may have to wait, so you can continue to work to pay off your debt.
2. High debt decreases your credit score – The credit score is the amount of money you can borrow to buy things, such as a house. If you are maxed out on all your accounts, the credit bureaus will know that, and report it to lenders. Not just lenders, but employers can also look at this, if you agree to it in writing.

Debt can land you in prison, or bankrupt – Desperate people do desperate things. These activities of desperation could land them in prison. Or, if they file for Bankruptcy, it will stick with them for the next seven years - not allowing them to get a loan, employment, or other activities they may want to do.