What kind of Debt is the Worst?

We all know that carrying any kind of debt isn’t exactly a “good” thing but is there actually a “worst” kind of debt to carry? Is credit card debt worse than student loan debt or mortgage debt? The fact is, even financial experts don’t agree on which debts are “good” and which ones are “bad” so, as a consumer, it can be rather confusing. To help with that confusion we put together a blog today that looks into what the worst kind of debt is and gives some advice from getting out from under it as well. Enjoy.

Debt: Student loans.

Why they might be the worst: Student loans are given to people with the least amount of credit experience (students, duh) as well as absolutely no idea about how to pay them back. Student loan balances are usually very high and, especially today, the jobs that students are relying on to be able to pay back these loans are sparse. Even worse, some students actually never graduate from college or university and thus have absolutely nothing that will help them to eventually increase their earning power. Also, student debt can’t be gotten rid of through bankruptcy like most other debts.

Why they might not be the worst: On average, college graduates still earn significantly more money during their working lifetime then people who don’t earn a degree. Student loans can thus be looked at as a type of investment whose payoff is the ability to earn more money in the future. If a student has some type of economic hardship they can also defer their payments (with interest, of course) and there are some loan forgiveness programs like the Income- Based Repayment Program.

Debt: Mortgage loans.

Why they might be the worst:  With nearly 9 million homes that either have negative equity or are very close, mortgage debt can be extremely bad. In the case of a homeowner with negative equity they actually owe more to the bank than what their house is worth. Selling it means either losing money or having a “short sale” that can damage their credit. The rising cost of taxes and insurance as well as maintenance add to the problem, as well as the fact that most mortgages take 30 years to pay off.

Why they might not be the worst: Holding onto a home (albeit for many years) is still one of the best ways for the average consumer to build wealth. If a person can keep up with their mortgage payments they will eventually pay off their home and it will then provide relatively inexpensive housing and the possibility of rental income as well. A reverse mortgage can allow them to use the equity that their house has built up and they can make a profit by selling it or pass it along to their heirs.

Debt: Credit Cards.

Why they might be the worst: Credit card debt usually carries an interest rate of 15% to 20%, some of the most expensive for any type of loan. When you take into account the low minimum monthly payments that some credit cards offer, a consumer can find themselves in debt literally for decades.

Why they might not be the worst: if a cardholder finds themselves in a financial crunch, having the option to make minimum payments on their credit cards, while not the best of solutions, can give them time to get back on their financial feet without damaging their credit. When compared to falling behind on a mortgage or automobile loan, credit card debt isn’t nearly as damaging and even though they will have to deal with collection agencies, that may not happen for months or years and will usually end up with some kind of settlement package that reduces the debt considerably.

Debt: Auto loans.

Why they might be the worst: On average today, and auto loan will last for 66 months or 5 and half years. Some auto loans actually get stretched out to 6 and even 7 years meaning that, long after they have lost their value (and that new car smell) the buyer is still making payments. By the time the auto loan ends the car or truck might not have any value left at all and could also have cost the owner hundreds or even thousands of dollars in maintenance and repair costs.

Why they might not be the worst: Cars are a modern necessity that people used to go to work and earn money and thus can be seen as a business expense. If a consumer budgets well, makes their car payment a priority and takes very good care of it (and if they aren’t surprised with unexpected repairs), they may be able to sell it or trade it in for a good price when they need to purchase a new one.  Today you can also refinance an automobile loan and lower the monthly payments, and automobile loans that are paid on time can actually help someone’s credit score too.

At the end of the day the worst type of debt is simply the one that you aren’t able to pay back on time. When this happens your balance will grow larger and your credit scores will take a big hit. You might even be forced to borrow more money just  so that you don’t fall behind on payments.

If you’re having trouble with debt of any kind and looking for financial advice or solutions, please let us know by sending us an email or leaving a comment and we’ll get back to you right away with answers that you can use.

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