Debt: My Favorite 4-Letter Word

Debt: My Favorite 4-Letter Word

By Craig Kirkland, EVP/Director of Retail Banking, Nevada State Bank

I have a favorite 4-letter word, one that I use with zeal and reckless abandon. You’ve probably guessed it: DEBT.

Debt isn’t a bad thing. It comes down to the type and how you use it. Debt affords you the ability to leverage, which allows you to borrow, and the opportunity to earn a higher rate of return on an asset. If you have $20,000 in cash, you can leverage that by borrowing from the bank to get a mortgage. Take your $20,000 and get an $80,000 loan to purchase a $100,000 piece of property. You now have a $100,000 asset working for you — you’re leveraging debt.

Debt is a useful and vital tool for consumers and businesses. It’s essential to most small businesses, providing capital to help them launch, grow, and thrive. Student loans, used prudently, can afford you an education and help bolster your future earning power. On the other hand, certain types of debt — like high-interest credit cards — should be avoided if possible. If you have credit card debt, find the best and lowest rate possible and work to pay down the balance. If you make only the minimum payment each month on credit card debt, it will take you a long time to pay off.

Other forms of unsecured debt, like personal loans and lines of credit, tend to have a higher rate of interest because there’s no collateral securing them — which means more risk to the lender and a higher rate for you, the consumer. Even secured loans (like auto loans) can be costly. If you’re FICO score-challenged you could end up paying an interest rate in the high teens and more for a car loan.

Debt can be rather easy to put on, but extremely hard to take off. If you’re going to drop debt, you must spend less than you take in to create a funds surplus — then be disciplined enough to allocate those funds to paying off the debt. If you have high-interest revolving debt, use any money surpluses that come your way to pay that off and tamp down your usage.

The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank. Nevada State Bank is a division of Zions Bancorporation, N.A. Member FDIC