Last week I wrote about debt. Majority of people during their journey to wealth will use and manage debt. But some debt is simply BIG BAD and UGLY. Too many Americans are deeply in debt, and taking no steps to come out.

MY INTRODUCTION TO CREDIT CARD DEBT
After college, the easiest credit card to obtain was Sears. I needed to build my credit, so I applied and received the Sears Credit card. I honestly believe my cat, Jazzy, could have qualified for a Sears credit card. Decades ago, Sears was the combination of Walmart and Amazon. Sears was the largest employer in the US and sold appliances to over 50% of American homes. My Mom always had Sears Kenmore appliances. You could completely furnish your apartment/house and take care of a lawn without ever shopping outside a Sears Store. Clothes, appliances, diamond rings, tools, furniture, garage doors, even a house. Seriously, you could order a Sears Craftsman house. It was shipped with a floor plan and all the materials required to build. If you did not live near a store -no problem, Sears printed a ~900 page catalog and you could order any product they sold. At Christmas time, my brother and I would flip through that catalog looking for gifts. More than a century before online shopping emerged, the Sears catalog brought a nearly limitless assortment of products into American homes by mail. Sears was successfully delivering packages prior to the birth of Jeff Bezos, Amazon CEO!

So I get my Sears card in the mail. I was excited so of course I had to use it (My definition of dumb – Buying something on credit you don’t really need). After a few months, I had built up a balance of $2,000. {By the way, every great and beautiful thing I purchased on credit, is now in a landfill.} This was my first job out of college, so suddenly owing Sears, $2,000 was not fun.

One month these very nice Sears people sent me a letter. I will paraphrase: “Dear Mr. Powers. We truly value your business and greatly appreciate your loyalty so feel free to skip your next monthly, payment with no penalty. With Love. Sears People.” Now let me translate. {Read this in your best Count Dracula voice}. “GOOD E-V-E-N-I-N-G: We love that 18% interest you are paying and want to extend those payments for a LONG time. Actually for the rest of your life. So this month, just skip that nasty payment that jeopardize our profit machine. And by the way, there is NO need, NONE, to read that tiny print on page two. Trust us!! After all we are not blood suckers!!”

REALITY OF PAYING MINIMUM PAYMENTS
Assume a $2,000 credit balance with an 18% annual rate, with a minimum payment of 2% of the balance, or $10, whichever is greater, would take 33 YEARS and six months to pay off. You would end up paying > $4,931 in interest and charges, in addition to the $2,000 you owed. I begin to wonder if Sears wanted my blood and first born!

The reality, if I continued to pay the minimum payment, I would still be paying off my balance. There is NO, for profit company, that will EVER give you anything, without plotting to suck more money out of your pocket!

COUNT CREDIT

Sears was making a fortune off this killer, known as compound interest. This nice store, run by these friendly people, were robbing me blind. Welcome to Credit Card U.S.A.

The next month, I significantly increased my monthly payments and paid my balance off in less than 12 months. At an early age, Sears taught me credit card debt is BIG BAD and UGLY. If there is reincarnation, I want to come back as a credit card company owner! Today, banks pay us a fraction of one percent interest for our hard earn savings. Something like 0.000000001 percent( slight exaggeration) ! Almost NOTHING. Banks then mail out thousands of credit card applications to addict as many or us as possible. They started sending my daughter credit card applications when she was a five! Not kidding. Banks take our hard earned savings, pay us essentially nothing and then charge 16-20% interest (if you have good credit). I wonder if Bernie Madoff every owned a bank?

GOOD DEBT
Some types of debt are actually good.
HOME MORTGAGE: Buying a home can be a sound investment, as long as you do not buy more home than you can afford. I know people who have more than tripled their house value, after their loan was paid off.

STUDENT LOANS: Pursuing education after high school, including technical training, community college, etc, will normally pay off in the medium term. Just make sure you do your homework first. I do not advice getting your BS: In the Study of The Digestive System of Ants! You can be unemployed, without incurring student loan debt!

ENTREPRENEUR COSTS: Keep in mind, majority of US Millionaires work for the best boss in the world. No not me! Themselves! You normally have to spend money to make money. But control your cost. If you are starting a new You Tube Channel, use your iphone and a tripod before buying $1000’s of equipment. Work from your home and delay renting an office until you have sufficient cost. Control your cost and increase your profits.

BIG BAD AND UGLY DEBT
CREDIT CARD DEBT: Credit cards come with high interest (16-21%). And many people get into serious debt and trouble. Some finally declare bankruptcy and ruin their credit for years. Try and pay your credit card balance in full each month. If you have an emergency expenditure, pay as much as you can afford each month, until the debt is paid in full. You can learn to live within your means by using a debt card versus a credit car.

CAR LOANS: New cars depreciate ~11% the SECOND you drive off the lot. And continues to depreciate every day after. In most parts of the US you need a reliable car. Buy a car, within your budget (not the budget the car saleswoman calculates for you) and keep any loans small. Pay these loans off as quickly as you can. Majority of US millionaires, buy good quality USED cars.

PAYDAY LOANS: These are one of the worst types of loans because you pay a high dollar fee for a loan for a short period of time, but if you can’t pay it back on time, you’re going to be slammed with more costly fees. The only winner-the loan company. If you cannot pay the loan back they will go to court and garnish your wages for as long as it takes.

Lesson Learned: Good debt can be used to help you achieve wealth. Big, bad and ugly debt, will knock you off your journey.

Styron Powers

“Gratitude turns what we have into enough, and more. It turns denial into acceptance, chaos into order, confusion into clarity…it makes sense of our past, brings peace for today, and creates a vision for tomorrow.” –Melody Beattie