Year-End Debt Checkup: Make Sure Yours Is Healthy Debt


Americans have set another record. It's not a good one, though.

U.S. consumer debt hit an all-time high in October, with borrowing rising by $14.2 billion over September levels, to total $2.75 trillion. But there's a little silver lining in the news: Most of the gain -- 76 percent of it -- came from auto loans and student loans. Only 24 percent reflected a rise in credit card borrowing. That's worth noting, because all debt is not equal.

The bright side
Some debt is not only good, but critical. Without the ability to take out mortgages, for example, most people couldn't afford to buy their own homes. Without student loans, many couldn't afford the educations that can help them earn more throughout their lives. Even car loans have their place.

Better still, these types of loans typically carry relatively low interest rates, at least compared with credit cards. In recent years, of course, interest rates have been near record lows, taking much of the sting out of some of these debts. Consider that the prime rate, which influences many interest rates, has recently been 3.25 percent, but was as high as 11.5 percent in 1989, 13 percent in 1984, and 20 percent in 1980.

The dark side
Then there are other kinds of debt that are more problematic. Even in our current environment of ultra-low interest rates, when a 30-year fixed-rate mortgage features rates of 3.5 percent, the average interest rate on credit cards is about 15 percent. Those mired deep in credit card debt are fighting a tough battle as they try to pay off what they owe while also paying steep sums in interest. A $20,000 debt that's charged 15 percent in interest will eat up a whopping $3,000 annually.

That's the problem with high-interest rate debt: If you don't manage to keep up with your payments, it can snowball, making a bad situation much worse.

So as you consider your overall debt picture, be mindful of taking on these other troublesome kinds of debt:

  • Borrowing from a 401(k) account is one way to get your hands on money that you want or need, but you can be short-changing your future. All the time that that money is out of the account, it's not growing for you.
  • Taking out a home equity loan can also be a regrettable move, especially if you use the money to pay off credit card debt. Yes, you can end up with lower rates and payments, but the loan might be stretched out so long that you still end up paying too much. And while credit card debt is unsecured, home equity loans are secured by... your home.
  • Investors with brokerage accounts can borrow money "on margin" and invest with it. The upside is that you get to invest more money overall. The downside is that you pay for the privilege, and your gains have to exceed your interest cost in order for you to come out ahead. Using margin amplifies your gains, but also your losses. At the Charles Schwab brokerage, recent margin interest rates were 8.5 percent for those with a debit balance of up to $25,000, and 8 percent for balances between $25,000 and $50,000. Considering that the average long-term return for the U.S. stock market has been around 9 percent to 10 percent, with many periods below that, investing on margin is clearly risky.

As you go through life, borrowing now and then in order to buy a home or car, go to school, fix up your house, or just buy a new TV, be smart about it. Avoid all high-interest rate debt, and pay any you have pronto. And only take on low-rate debt when it really makes sense and you can afford it.

You can follow Motley Fool contributor Selena Maranjian on Twitter here.

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Alena Willim

A loan is a financial transaction in which one party - the lender - agrees to give another party - the borrower a specific amount of money which must be paid back in full.

July 12 2013 at 2:31 PM Report abuse rate up rate down Reply

The problem is that most people do not live within their means and spend more money than they earn. To my opinion, it’s worth to borrow money only if it’s really necessary, it’s not right when being in debt becomes a life style. We have lots of borrowing services available and lots of people who do not have enough money, so they solve all the problems with borrowing cash. I have even heard that some people pay for coffee in a café with their credit cards. If you do not have enough money then try to save more or change a job, the most important is to understand that borrowing will not make you richer.
Bradley from

December 27 2012 at 5:42 AM Report abuse rate up rate down Reply

Check and see how much you have now as to after the government collects the taxes.

December 26 2012 at 1:17 PM Report abuse rate up rate down Reply

Bull, taking out a home equity loan to pay off high interest credit cards is most definately a good financial decision.

December 25 2012 at 5:41 AM Report abuse rate up rate down Reply
1 reply to Michael's comment

If you cut up your credit cards and don't use them again, otherwise you are right back in the same situation..having a 0 balance on a credit card makes people think they can use it again and not go out of control!

December 26 2012 at 10:20 AM Report abuse -1 rate up rate down Reply
1 reply to terrynurse1's comment

In an emergency, you need a credit card. If you get a flat tire in the middle of nowhere and need a tow, you will need that credit card. If you have a close relative dying and you want to go to say good-bye, you need the credit card to book on-line. If your daughter needs medicine urgently, you need a credit card.

December 26 2012 at 3:10 PM Report abuse rate up rate down

Maxing out your credit cards is like involuntary servitude, but at least the latter was only for a definite period of time.

December 25 2012 at 4:31 AM Report abuse rate up rate down Reply

Stay away from loose women and debt....both are bottomless holes.

December 24 2012 at 10:58 PM Report abuse rate up rate down Reply
1 reply to davefromfwb1's comment

And strangely.....the former always leads to the latter.

December 25 2012 at 3:10 PM Report abuse rate up rate down Reply

stay away from ALL debt

December 24 2012 at 8:30 PM Report abuse +1 rate up rate down Reply