Understanding debt in 2 minutes. Part one: Private debt. People and businesses take on private debt because they want to buy something today and pay for it in the future. For example, buying a home or factory with a loan gives people access to a property before they generate the income to pay for it, and in this case the building itself can be used as security to be seized if the borrower doesn't repay the lender. This is widely seen as good debt as everybody benefits but if for example property prices fall
and the security is worth less than the loan, as happened before the crash of
2008, and if the borrower doesn't have the income to repay, it becomes bad debt
where somebody is bound to lose out.
People on low income needing to borrow
for current consumption, like food, can rarely offer any security, and with such
a high risk of a bad debt, rates of interest on so-called payday loans for example can be massive. Debt often gets a bad name but nearly all innovation, art, medicine, and food production requires upfront spending before income can be achieved. And it's debt that can help people without wealth to create some. Part two: Public debt. Public debt is essentially the government's overdraft. The total amount borrowed which is still outstanding. Government borrow to spread the cost of current projects across future years and hope to achieve long-term benefits for their future populations, solve medium-term fluctuations in their economic activity, and fix short-term economic crises. And because governments don't retire or die and particularly as big governments
already own a lot of assets as security and can always increase their income by raising taxes from the private sector they are seen as credit worthy and trusted to borrow large sums over long periods of time by issuing bonds and hoping that future growth or indeed inflation will reduce their debt over
time.
So even with massive debts the United States government is able to keep
on borrowing while smaller countries require the
support of development banks and backup from agencies such as the IMF if they
are going to borrow anything at all. Get more from The Open University, Check out the links on screen now..
Credit cards are a way of life for most
consumers, with Americans building up billions of dollars of debt each year.
Credit cards have their origins in the early 1900s when department stores began offering lines of credit to their best customers. The patron would make a
purchase without putting money down. The cost of that service became the
consumer's debt which needed to be paid back, sometimes in installments. Nowadays credit cards are everywhere and Americans can't get enough of them.
Consumer Reports Money Editor, Octavio Blanco, says first of all if you're going
to sign up for department store cards be careful.
If you're shopping in a
department store you might be tempted to get a new card when the cashier offers
you a 10 to 20% discount. Hey it's a great deal. A 10 to 20%
discount might look tasty but these cards tend to have very high interest
rates the average interest rate for store branded credit cards is about 25%, the average for other cards closer to 17 %, much lower.
And Octavio says beware of having an outstanding balance on a store card at
the end of the month. If you don't pay your bill in full each month the
interest can make a small credit card bill quickly balloon into a large one
but if you think you can make full payments on time then you should be
alright with a store branded card. Wallet getting a little too thick? Think twice
before thinning it out by cancelling a card. Cancelling a card can hurt your
credit score because it lowers your available credit limit. A credit score is a
tool used by lenders to estimate your ability to repay debt the lower your
score is the more likely you are to get a bad deal from financial institutions
that's why according to Octavio cancelling a card can have serious
consequences. And it could even lead to higher rates when applying for a
mortgage, car loan, or insurance, plus you could be losing
out on some pretty sweet credit card perks like travel benefits, lowest price
guarantees on products, and even theft protection insurance. If you really don't
want to use a card anymore we recommend just putting the card away
and stop using it rather than closing the account altogether.
Does that mean
you should only have one credit card in your wallet? Not necessarily. Having
multiple cards gives you more available credit and if you have more available
credit and you're managing it correctly you'll be more attractive to potential
lenders. I like this guy. Not only that, but different cards offer different
perks. With multiple cards you can play the rewards game one thing to keep in
mind with some rewards cards: annual fees. For example, airline-branded cards often
have annual fees that can run as much as 450 dollars but they include perks like access to airport lounges, a free checked bag, and priority
boarding so if those benefits outweigh the cost of the fee it might be worth it.
More rewards: awesome. Good credit: even better. That's some advice you can take
to the bank..
