Like nearly everything having to do with personal finance, debt can be an emotional as well as a practical issue. There was a time when indebtedness was considered a character flaw; an attitude that eroded rather quickly as our desire for instant gratification grew to the stature of a demand. People’s current attitudes towards debt range from shame and embarrassment over having to borrow money, to a sometimes-cavalier acceptance of borrowing as a necessary tool for sustaining a comfortable lifestyle or a profitable business, to even holding one’s indebtedness forth as a badge of one’s elevated financial status. People who find themselves too deeply in debt often suffer stress, anxiety, and perhaps even embarrassment. Others simply shrug it off and either work their way out of debt or keep on spending, thus getting themselves in even deeper. No matter how we may feel about indebtedness, the way we manage our debts is a big factor in determining our creditworthiness.
Though all of the above may seem self-evident, it seems that many people negotiate their financial lives without ever taking stock of their attitudes towards money and debt, or exploring the effects of those attitudes on their behaviour. For these people, a little more introspection might be in order, because whether or not they’re paying much attention to their behaviour and its consequences, the credit agencies most certainly are. Like it or not, our creditworthiness can have a huge impact, for better or worse, on how comfortable a lifestyle we’re able to maintain.
“Debt” Isn’t a Dirty Word, but…
At some point in our lives most of us are faced with the need to borrow money, either for a major purchase or a more modest expense. There is nothing intrinsically “bad” about assuming debt, so if shame is an attitude you’ve been harbouring, it’s time to rid yourself of it. That said, borrowing is one obvious area where having good credit puts one at a distinct advantage. Those with poor credit will generally discover that they don’t qualify for the most desirable – if any – loans. Fortunately there are several types of financial products available for people with bad credit, but most of these loans are saddled with high interest rates.
Even so, you still have some choices, and there are some things you may be able to do to make more choices available. For instance, keep in mind that lenders do not charge fixed interest rates, but base them upon your credit profile. Accordingly, if you work to improve your profile a little before you apply for the loan, you could get a better interest rate and possibly a wider choice of lenders.
The Larger Problem
While improving one’s attitude towards debt can be constructive, it would be a mistake to dismiss the larger issues. After all, debt is more than just an emotional matter and practical problem for individuals; consumer debt affects our overall economy as well, though just what the effects will be remains a matter of debate.
Collateral Damage: Lack of Investment
Those who use debt in moderation as a tool are not likely to be the bigger part of our collective debt problem. As a matter of fact, the prudent use of debt to foster productivity or improve one’s lifestyle can provide a significant boost, not only to the individual or business, but to the greater economy as well, so long as that indebtedness does not approach or worse, exceed, the individual or business’ income and assets.
When an individual or business relies upon debt to cover routine or recurring expenses, it is a sign that there is likely little in reserve to put in savings. Any interruption or untoward event in either borrower’s routine demands further indebtedness, leaving even less to be set aside for the inevitable next interruption or event, and the ratio of liabilities to assets continues to rise. Such has been the case for the better part of the last decade at least. As individuals and businesses struggle to at least project an image of business as usual, their net worth continues to decline in direct proportion to their indebtedness. The calamity will arrive if and when that net worth plunges into the negative and businesses and individuals begin defaulting en masse.
Turning Things Around
The solution sounds – and is – quite simple, on paper at least. Exercise restraint when accumulating indebtedness, and set aside in savings as much as you comfortably can. The real challenge here is the inherently subjective definition of what constitutes “comfortably”. Breaking the addiction to debt (and an addiction it surely is) cannot be achieved until one is able to objectively discern whether the debt-inducing action is genuinely essential or an article of preference. If the former, a reasonable increase in debt may be justifiable or even necessary. If the latter, additional consideration at the very least is indicated. In the majority of cases, such further consideration should lead to an increased savings plan in lieu of the expenditure under consideration.
Although some people will always look at debt as at best a necessary evil, the truth is that, properly handled, it can be a useful tool for building credit and creating a profitable business or a more comfortable life. The challenge is to be fully aware not only of your or your business’ financial condition, but of your true objectives where the debt is concerned. And no matter how good or bad your credit is, you can probably improve it by cultivating the right attitude and taking action in accordance with that attitude.