Understanding Consumer Debt

by Charlotte Wood
(last updated February 21, 2009)

As a society, we've steeped ourselves in greater and greater debt as the decades progress. Consumer debt is at an all time high and in order to protect ourselves from this financial vice we need to understand exactly what consumer debt is. Once we understand what consumer debt is then we can take the necessary steps to preventing consumer debt in our own lives.

Consumer debt is different from investment debt because it focuses on—believe it or not—actual consumption as opposed to basing itself in investment debt. Translated, consumer debt is best manifested in credit cards, payday loans, and other forms of consumer finance.

Consumerism has grown significantly in recent years and much of it due to a rise in materialism. People think that they need to have the latest fashions, the newest cars, the most cutting-edge gadgets, regardless of whether they can actually afford it.

This is where the most common form of consumer debt, credit cards, comes in. Credit cards allow you to spend money you don't currently have and ideally pay it back later with some interest tacked on. When used unwisely, consumer credit can decimate your financial life and dig you a deep hole of debt that's almost impossible to fill. \

Investment debt however deals with things like mortgages (e.g. investment in your home). This is different and less dangerous because it's not so "carefree" initially. Going into this kind of debt takes a lot more thought and necessitates a much more thorough process. This is for obviously for things for which you would probably never have enough money at one time. These kinds of loans are sometimes impossible to avoid in your life (like a mortgage).

Interest rates on consumer debts are higher as well because they're way more dependent on your actual spending habits and the nature of the debt is unstable anyway. If you can, avoid consumer debt. It's harder to rid yourself of it and can take a higher toll on your financial security. If you're having problems with a mortgage for example, if you attack the problem right away and work something out with the bank, then it's easier to fix the problem. Consumer debt is different; if you don't keep up on it, you'll become buried in an exponentially expanding balance.

Consumer debt is one of those things that's usually possible to avoid and if you can then do. Don't fall prey to "deals" and the like just because you want to buy more things you want. Only become involved in consumer debt if you have to and then make sure you keep tabs on it and don't let it run amok with your bank account.

Author Bio

Charlotte Wood

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