Consumer Debt

Rolled receipt and cash.

Consumer debt consists of any money owed as a result of an individual purchasing items or goods for personal consumption. Debt is usually collected on credit cards, in-store payment plans or other agreements in which the seller agrees to the buyer taking an item without paying for it up front, but instead waiting to be paid until a specific date or paid over a period of time.

What is Consumer Debt?

"Consumer debt" includes amounts owed for purchases of furniture, food, clothing, entertainment items and personal loans such as those to attend school or to purchase a home. Loans for professional services, utility bills, legal fees, court settlements, or contracted work may also be considered consumer debt, depending on the lender and the consumer's state of residence.

Interest Issues

Usually, the consumer agrees to pay interest on their debt for the ability pay it off over time. The amount of interest charged on a debt and how often it is charged varies depending on the cost of the item and the seller. After being charged, the amount of interest is usually added to the overall balance due. This can result in a significant increase to the cost of an item.

The Necessity of Debt

Very few consumers do not have debt. In fact, maintaining some level of debt is necessary for most people, mainly because they do not have the cash available to buy furniture, electronics, vehicles or other large ticket items.

Debt is not necessarily a bad thing. Although significant amounts of debt are viewed by most lending institutions as an indication of trouble, a small amount of debt which is paid on-time and according to the credit agreement is viewed favorably. Therefore, debt is not, in itself, a bad thing.

When Good Debt Turns Bad

Too much debt, however, affects an individual's credit score and report. All debt and its characteristics, meaning the terms of the credit contract, are reported to credit reporting agencies. The three main agencies are Experian, TransUnion and Equifax. Debt that is overdue, in default or extremely high amounts of debt affect a score and report negatively. A bad score or report could make it difficult for an individual to get credit in the future, or to get it on good terms, meaning with a low interest rate.

Lenders need some idea of an individual's potential loan risk, and so turn to credit reports and scores to determine the individual's overall credit history, including whether payments have been timely and whether there are any outstanding fines or uncontrollable balances still owed. If the credit history demonstrates a consumer's responsibility and good debt management, this is when having debt is, oddly enough, considered a good thing.

Controlling Your Consumption

The key to controlling debt is to be a savvy consumer. Even with a small amount of debt, savvy consumers:

  • Investigate purchases carefully and only assume additional debt if necessary
  • Work to pay off debts on time without penalties
  • Avoid tempting credit card offers and new credit lines just to obtain promotional bonuses
  • Save money wisely to avoid accruing more debt in emergency situations
  • Track purchases and debts conscientiously to keep apprised of impending problems
  • Make incidental and luxury purchases with cash and save credit cards for emergencies
  • Periodically examine monthly bills to find ways to reduce costs, such as by lowering service levels
  • Check their credit reports regularly for fraud or mistakes

By being aware of spending patterns, debt totals and potential problem areas all consumers can easily manage their debt without taking drastic spending reduction steps or curtailing favorite activities.

Avoid Being Consumed by Your Debt

There are times when consumer debt can escalate out of control, but before assuming that the situation is hopeless, consumers can try to get out of debt and avoid further problems. Debt consolidation programs lump different types of loans and payments into one monthly bill, often at a lower interest rate than may be possible on individual balances. Many people will attempt to transfer credit card balances from one high-interest card to a new card with a lower rate, but be aware that doing so can result in high penalties if those totals are not paid within the promotional period. Credit counseling programs are also available to assist struggling individuals in managing their debt and assessing spending habits.

All consumers should work to keep their spending and debt under control, whether they are purchasing a new car or simply charging this week's groceries. By tracking individual purchases, regularly investigating credit reports, and conscientiously making appropriate payments, consumer debt will not threaten a careful consumer's wallet.

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