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Anyone at a point where they are making monthly payments on multiple credit cards has already lost the debt game. People don't manage debt better because they h

by imgabe 11y ago

Anyone at a point where they are making monthly payments on multiple credit cards has already lost the debt game. People don't manage debt better because they have been marketed to and taught to use debt completely inappropriately. Debt should be used to purchase an asset that will appreciate or otherwise provide an income in excess of the interest payment on the debt. Full stop. That is how businesses use debt and that is the only sensible strategy. As a consumer, a house may be a sensible use of debt. A reliable car needed to get to work may be a sensible use of debt. A student loan might as well. Carrying a balance on a credit card is almost never an appropriate use of debt. Unfortunately, marketers have instead convinced consumers that debt is an easy way to buy things they can't afford and pay for it later. This is almost always a losing proposition for the consumer, who invariably ends up paying much more than they would have if they had just saved up and bought the thing in full up front. The way to sensibly manage this is to not fall into the trap in the first place.

jonknee 11y ago
> Debt should be used to purchase an asset that will appreciate or otherwise provide an income in excess of the interest payment on the debt. Full stop. That is how businesses use debt and that is the only sensible strategy. Businesses use debt in all sorts of ways, they certainly don't limit it to buying assets. A common use recently is to fund share buybacks which is essentially an easy way to engineer higher earnings per share and make investors happy (but not providing any actual income). Another common use is commercial paper markets which corporations use for short term obligations (payroll!) and to smooth out cash flows, this is actually pretty similar to a credit card on a personal scale.
- forgetsusername 11y ago
  >Businesses use debt in all sorts of ways, they certainly don't limit it to buying assets. A common use recently is to fund share buybacks You don't think buying a stake in a successful company (in this case one that happens to be your own) is buying an asset? The mechanations are slightly different, but you're still buying shares. An effect is rising EPS (due to retired shares), but that isn't the purpose.
  - jonknee 11y ago
    Not at all, it's a giveaway to executives (who get bonuses based on EPS) and long term shareholders. Some firms also borrow money to fund a dividend which is just a literal giveaway.
    - forgetsusername 11y ago
      >Not at all, it's a giveaway to executives (who get bonuses based on EPS) and long term shareholders. Putting aside the executive giveaway (because I have a hard time believing that there are executive bonuses so intertwined with EPS that the company can just burn money on buybacks to increase that bonus without any external fuss or anyone questioning why)... ...who or what else matters beyond the shareholders? Share buybacks aren't a scam. They exist as a method to return capital to shareholders and can be smart or not depending on a variety of financial circumstances. Just like every other financial decision. http://aswathdamodaran.blogspot.ca/2014/09/stock-buybacks-they-are-big-they-are.html http://aswathdamodaran.blogspot.ca/2014/09/stock-buybacks-th...
  - ska 11y ago
    but that isn't the purpose Sometimes that is precisely the purpose.
- surfearth 11y ago
  You're correct that there are a multitude of uses for debt (e.g. working capital management). I do think the parent was on to something though - the cornerstone of the private equity/leveraged buyout industry is borrowing debt below your return on equity to amplify returns. This can be a wise strategy for individuals to cautiously replicate.
- usefulcat 11y ago
  I can see how a share buyback would put upward pressure on the share price, but how could it have a positive effect on earnings? Seems like it would have to have a negative effect on net earnings over the long term if the buyback was financed via a loan, due to the need to repay the loan.
  - chkuendig 11y ago
    Parent was writing about "earnings per share", key word being "per share". So with fewer outstanding shares, this obviously increases.
    - usefulcat 11y ago
      Ahh, ok that makes sense, thanks.
      - jonknee 11y ago
        And EPS is one of the big metrics for share prices (the PE ratio uses it for example). It makes sense that if there are less shares they should all be worth more, but EPS is the reason why that is the case.
- newjersey 11y ago
  I imagine when you "buy" your supplies and don't pay for them until about ninety days after you took delivery of the supplies, that is considered debt as well? I mean if I want to ship something, Fed Ex will ask for payment up front but when Amazon.com ships something they probably don't actually send the money right away. I am still trying to grasp this concept credit terms. I must add that I have had no training in this field and have basically just skimmed through the soylent blog post http://blog.soylent.com/post/133420708272/pricing-soylent-efficiently http://blog.soylent.com/post/133420708272/pricing-soylent-ef... so in my mind, what we want to do is get the "interest-free loan" from our supplier of equal or greater duration to the credit term we give our customers. I imagine this is a double whammy because suppliers offers better terms when the going is good and become strict when the going gets bad. Now that I think about it, perhaps Apple sitting on a pile of cash isn't such a bad idea after all right? I mean if they have to go through a rough patch again, won't any credit terms they get (banks, investors, or suppliers) automatically be worse? I don't know the rules about financial stuff but my perception is that as public companies there is only so much information you can withhold (and only for so long) without breaking financial regulations (and those regulations presumably exist for a good reason).
  - cperciva 11y ago
    I mean if I want to ship something, Fed Ex will ask for payment up front They might ask for payment up front, but they'll quite happily take a credit card instead. Yes, credit cards are a form of transactional debt if you pay them off each month; they allow you to enjoy your purchases for ~ 1 month before paying for them.
    - newjersey 11y ago
      I imagine the credit card payment processor pays at the end of the month? So when one accepts payment using credit card, is that an automatic 30 day credit the seller has extended to me? I didn't think about that. So essentially, the credit card issuer didn't really spend "their money" at all. Wow. The more I learn the more I realize how little I know.
zrail 11y ago
> Debt should be used to purchase an asset that will appreciate or otherwise provide an income in excess of the interest payment on the debt. Full stop. In 2014 only 34% of households carried credit card debt month to month[1]. The majority of households pay it off every month, simply using it to smooth out irregular cash flow while potentially racking up rewards. They're not purchasing an asset, per se, unless you count the rewards and the tiny amount of bank interest they may receive. [1]: http://www.creditcards.com/credit-card-news/credit-card-debt-statistics-1276.php http://www.creditcards.com/credit-card-news/credit-card-debt...
- Roodgorf 11y ago
  Wouldn't being able to continue your life unobstructed by the need for some potential purchases be an asset in the same way the parent described student or car loans as potential assets? If something comes up outside your usual cash flow, say a tire blows, and smoothing out that irregularity helps you keep your job, I would consider that a worthwhile investment.
  - zrail 11y ago
    Student and car loans are not assets. They are debts used to finance assets.
- gtk40 11y ago
  I don't even think of myself as using debt. I see credit cards as a way to get an extra $50-70 a month in rewards[1] and increase my credit score. I have never paid a cent of interest. [1] I have a card that gives me 5% cashback in gas, groceries, and books up to a limit that does not often surpass what I spend and some rotating 5% cash back cards, in addition to a 2% general spend. I do not pay any annual fees for using the cards.
  - zrail 11y ago
    Interesting. What card is this?
yummyfajitas 11y ago
Consumption smoothing is a perfectly valid use of debt. Suppose I have utility = log(consumption), but my income is volatile. If I have 1 income in year 1 but 10 income in year 2, and use no credit, my utility is log(1)+log(10) = 2.3. If I use credit, I can have utility log(5.5 / (1+r)), with r the interest rate. At 10% interest, that's 3.2. At 20% interest that's 3.0. At 50% interest that's 2.6. So even at 50% interest I'm increasing my utility by 10% due to the use of credit.
- navait 11y ago
  While that's a valid point, the parent was speaking in generalities across most people - given that most people have consistent incomes from wages, do they really need consumption smoothing?
- carlob 11y ago
  Correct, but a bit misleading. You're taking a person that has income that increases tenfold over a year. For most people the rate of increase of income is smaller than credit card interest rates, and you can really justify high interest rates when you assume that you're going to make a lot of money next year, but then again Steinbeck said that most Americans think of themselves as temporarily embarrassed millionaires :)
  - yummyfajitas 11y ago
    Probably "year" is the wrong time period, but lots of people have very volatile income. A consultant can easily have 10x variance in income from month to month. A musician or actor might have 0 gigs one month and 5 gigs the next. Shortening the time period just lowers the financing costs.
    - carlob 11y ago
      True, but still how many broke musicians and actors should be considering this month's zero income a fluctuation and get into credit card debt and how many should just be more conservative with their spending?
bradleyjg 11y ago
I don't think such an absolute position is warranted. It's true that saving up for a big purchase will end up costing you less money than borrowing to pay for it and paying it back. But you will have the item purchased for less time. Suppose you have enough disposable income to pay for a new $1200 TV over the course of 12 months. In scenario 1, you save $100 each month. The bank pays you 0.5% interest. As of January 1st next year you'll have a new TV and $2.75. In scenario 2, you put $1200 on a credit card with a 10% APR. You pay $100 each month towards the credit card bill. As of January 1st next year you have a TV you've been watching for a year already and owe $69. You've essentially paid $72 for the privilege of getting the TV you wanted a year earlier. Is that worth it? Well that depends on a lot of things, some of them intangible, but I wouldn't say it can't possibly make any sense. The sort of Puritan attitude towards consumption and debt may not be the worst attitude to have, at least for oneself. But when combined with evangelism it is pretty annoying.
- dragontamer 11y ago
  Now suppose you lose your job in Month 10. The TV-less person will continue not having a TV, and use those funds for emergency day-to-day living expenses as he (or she) gets his life back in order. You can even dip into your credit card credit line for an emergency. But the person who bought the TV on interest is in debt, has less credit to live off of, and only a TV to show for it. ----------- In either case, saving up a pile of 6-months of expenses cash-on-hand is a good strategy. If you have 6-months of expenses saved up, you simply buy the TV with that money, and then in a year you put money back into your cash account. Look, now you have the benefits of all strategies! Saving up money for emergencies, or even large expenses (LONG before you even think about those expenses) is the way to go.
  - nmcfarl 11y ago
    There’s a ton of comments on this article that I think are much more nutso. But this is the comment I’m going to reply to, cause people who keep emergency funds are probably open changing their mind via reason. Touching your 6 months emergency expenses fund is completely against the point. The reason you have this cash is for out of the blue, hit by bus kind of events. You need it when you least expect it If you take your TV out of it you no longer have it - and this fund becomes nothing more than a general savings account. The kind of thing that drops low right after you buy a TV, or a car, which from my personal experience is exactly when bad things happen. And often bad things require cash on the barrelhead, not just credit cards. So don’t do this. Either save in a slush fund for your TVº, or put it on a credit card, but don’t take it out of your emergency fund and still call it an emergency fund - 'cause it’s not going to be there for you in an emergency. º or my personal favorite: a throw away, but named, savings account. (Like CapOne360, née Ing Direct, offers.)
douche 11y ago
It's pretty numb to use debit cards as opposed to credit cards, for various reasons. A.) You can't over-draw a credit card, and get hit with overage fees or bounced-check insurance, or all the other things banks do - particularly with the slightly nefarious way they often choose to order your transactions when they close their books. Particularly troublesome with businesses that put in a hold on your card, then charge you the actual price, and then refund the hold (like many fuel stations) B.) If you don't get paid weekly, and instead biweekly, monthly, or more sporadically than that, putting all spending that doesn't absolutely have to be drawn directly from your checking accounts on credit makes a huge amount of sense. You can float that tank of gasoline, or your groceries on credit, but when the heating oil needs to get filled, or the rent is due, you need cash in hand, and you don't want to get caught short. More of an issue if you're not paid very well to begin with and haven't got much cushion built up. C.) Buy stuff on credit, collect the reward points, pay it off before the next statement, and you've gotten free money for things you'd have to buy anyway. D.) If a credit card gets stolen and somebody goes on a spree with it, you just dispute the charges with your bank, they issue chargebacks, no real money is gone from your account. With a debit card, good luck, they just vacuumed money out of your real checking account.
- pessimizer 11y ago
  A) Opt out of "overage fees and bounced-check insurance" which would be the problem here, not debit cards. Keep track of your own finances. B) Don't live check to check. Keep track of your own finances. C) And if you fail to do that once (because you're probably living check to check), you've nullified any free benefit you ever received. D) Horseshit. I had my card stolen by the Target breach, there were charges on it all over Europe, and within a week I had every penny back.
  - ethbro 11y ago
    > B) Don't live check to check. Keep track of your own finances. I'm not saying this to be aggressive, but you're missing something in the calculation. http://www.investopedia.com/articles/03/082703.asp http://www.investopedia.com/articles/03/082703.asp
cm2012 11y ago
Eh. I used to make a lot less money than I did now. I got into around $10k of debt, mostly buying "useless" things that made life fun, like ordering in, etc. Now I make 4x what I used to and the debt is trivial to pay off. Debt also makes sense when money is worth more to you now than later.
- imgabe 11y ago
  Money is always worth more now than later. That's why when you pay back money later, you have to pay back more than you borrowed (among other reasons).
  - lotsofpulp 11y ago
    Not in the case of negative interest rates.
theklub 11y ago
Unless of course there is no interest for X months. Then what's the difference, assuming you are smart and pay it off in time.
taneq 11y ago
> Carrying a balance on a credit card is almost never an appropriate use of debt. One exception: Credit cards with those introductory "6 months interest free" clauses. Sign up for as many as you can get, with as large a limit as you can get. Max them all out on payments into a mortgage offset account. Just before the end of the interest free period, pay them all off again. (I've heard of this being done but I'd bet it's a lot harder to pull off these days.)
- HeyLaughingBoy 11y ago
  I did that about 20 years ago to pay off about 12k of debt I accrued. Basically kept shuffling the debt from one "interest free for 6 months" balance transfer to another until it was all paid off. They are still around today, just not as popular.
- rootusrootus 11y ago
  Clever idea, but these days I think that would be tough to pull off. Most balance transfer offers come with strings attached, typically something like a 3% fee for taking the money. That is almost as much as the raw interest rate on my mortgage, and might actually be more than the effective interest rate (considering tax advantages).
barrkel 11y ago
Debt is useful to change the time between income and expenses; it solves a cash-flow problem. That's the real key: treat it as a time adjustment in flow, and not as a stock. It's not something you can dip into, as it were; it's something you use to move consumption closer in time, in return for reducing potential consumption in the future. If you're using it to buy an asset that appreciates more than the interest on the debt, what makes you think that you're a better judge of asset prices than the people lending you the money? Why wouldn't they just buy the asset directly, and cut out the middleman? Businesses use debt for all sorts of reasons; cash flow, tax, paying out profits in a different form, or simply because debt is cheaper than equity.
- Jtsummers 11y ago
  > If you're using it to buy an asset that appreciates more than the interest on the debt, what makes you think that you're a better judge of asset prices than the people lending you the money? Why wouldn't they just buy the asset directly, and cut out the middleman? Because it's not their (core) competency or they don't want the risk. I could start my own company printing indie games. But I have no connections in the industry (well, not entirely true, but none that are exploitable for this), I have no experience running a business, but I do have capital. And someone else who does have those connections and experience wants to start up such a business. Collateral on the loan protects my money (partially) in case of failure to repay, while the risk is mitigated by having someone more experienced doing the work.
  - barrkel 11y ago
    Someone working in a company printing (?) indie games isn't an asset, though (except in the accounting sense of the lender, as a stream of repayments; but that's not the perspective that's under discussion - individuals borrowing, not lenders lending). Point being my rationale was slightly different; it includes more things - it's more general - and it's a bit more negative on the idea of simply buying a rent producing or appreciating asset.
    - Jtsummers 11y ago
Outdoorsman 11y ago
Well written... From experience (not mine) too many people consider only one factor when making the majority of purchases with credit: Can I make the monthly payment...? If they can they plunge headlong... Of course just paying the monthly minimum on outstanding credit card balances is disastrous...it's kicking a loaded can down the road...
stvswn 11y ago
That's a good way to use debt, but far from the only rational one. The best reason to use debt is for consumption smoothing. For example -- a car breaks down unexpectedly, and now the owner can't make it to work. They won't get paid if they don't go. "Save up for a repair" doesn't work. This is perfectly legitimate reason to spend now, pay later. It's the canonical reason to use credit. The asset they buy -- a new alternator, or whatever -- isn't going to appreciate. The interest they pay is simply to pay for the service of having money now instead of later. That doesn't mean it's foolish.
grahamburger 11y ago
Or, of course, if the furnace goes out right before Christmas and you don't have any money (except a credit card) because you were laid off 3 months prior and haven't been able to land a new gig yet. That's how I started the year with $700 more in credit card debt.
cynicalkane 11y ago
If you're going to go full economist, the correct use of debt is whenever the expected value of having something now instead of later exceeds the expected lifetime cost of servicing the debt. So it would be very reasonable to take out a loan for a car or a house, especially with interest rates around 4%. It might even be reasonable to take out a loan for furniture or a TV, but fiscally responsible people will usually have enough cash to pay instead, so in practice most responsible people don't take out loans for TVs. By the way, houses historically did not appreciate at high rates. The recent dramatic appreciation in housing prices in big cities is a giant blip in the data. You shouldn't bet on housing appreciating so well, and you shouldn't buy more house than you will use or rent. (If you think the increasing importance of big cities will automatically mean higher prices, ask homeowners in Tokyo how well that's been working for them.)
matthewaveryusa 11y ago
Another reason to take on debt, as an individual, is to leverage your position -- It's indirectly related to provide income in excess of interest payment. An example would be to take on debt to purchase a vehicle to broaden the area where you can potentially work. You have to make sure that you buy a vehicle at the optimal marginal return (so close to a clunker.) and I think that's where the problem resides: I see individuals have possessions that cost way below the optimal marginal return for status.
mrow84 11y ago
My understanding of debt is as the cost of shifting purchases in time, in the same way as barrkel [0]. Working out what the cost is going to be up front only works if you stick to your assumptions throughout repayment, which is a good way of understanding part of the problem with debt - even if you calculate properly against uncertain events for the average case, you as an individual can be caught out by bad luck. Attempting to subsequently solve the consequences of your bad luck with further debt seems to me an instance of the gambler's fallacy [1], and is another important part of the problem with debt. [0] https://news.ycombinator.com/item?id=11135283 https://news.ycombinator.com/item?id=11135283 [1] https://en.wikipedia.org/wiki/Gambler%27s_fallacy https://en.wikipedia.org/wiki/Gambler%27s_fallacy
deleted 11y ago
[deleted]
matwood 11y ago
I agree with you, but then who would pay for my travel points and cash back?
lossolo 11y ago
If there would be no debt on common products, then there would be no market growth, then capitalism would fail? Isn't that true ?
Shivetya 11y ago
It isn't just credit cards, it is all monthlies. They add up and can catch many people by surprise. Another trap is not paying for small items like coffees, lunches and the like in cash. You lose a mental connection there. Back to monthlies, the big ones are non negotiable and those revolve around your housing. For many the mortgage or rent will be with them for years. So pile on utilities and then comes nearly the near optional monthlies. You get your phone, your internet, your various streaming sites, and more. Then toss a car, credit cards, and then more. How to spot these people, look at ones who shop cars based on what kind of monthly payment they can squeeze up too. If they went over four years its a bad sign, if they went six plus, well end of story. Oh, one last note. Track your food purchases, all of them from grocery to on the go. You might be surprised
kulkarnic 11y ago
This is factually incorrect, in addition to being bad advice. You take on debt when the net present utility of the purchase is greater than the price of the debt. Here's a simple example to illustrate: you have an interview tomorrow, and you want to buy a suit to be sure you are appropriately dressed for it. The net-present-utility of the suit is quite high -- not having one may cost you the job opportunity. On the other hand, a suit is a depreciating asset. It is also not an income-generating asset (i.e. you may sell the suit the day after the interview at no loss of income.) Using the reasoning of "debt for appreciating/income generating purchase" will preclude you from buying this suit, sensible though the purchase is. PS: in an ideal world, you'd rent the suit, or any asset that has only temporary utility and pay depreciation+premium. http://john-joseph-horton.com/papers/sharing.pdf http://john-joseph-horton.com/papers/sharing.pdf
alecco 11y ago
Just appreciating is not good enough. You have to compare it to getting a safe investment paying market interest. http://www.investopedia.com/terms/i/irr.asp http://www.investopedia.com/terms/i/irr.asp http://www.investopedia.com/terms/n/npv.asp http://www.investopedia.com/terms/n/npv.asp Unless you take some utility of the appreciating asset, you should always go for the best investment.

by imgabe 11y ago

jonknee 11y ago

> Debt should be used to purchase an asset that will appreciate or otherwise provide an income in excess of the interest payment on the debt. Full stop. That is how businesses use debt and that is the only sensible strategy. Businesses use debt in all sorts of ways, they certainly don't limit it to buying assets. A common use recently is to fund share buybacks which is essentially an easy way to engineer higher earnings per share and make investors happy (but not providing any actual income). Another common use is commercial paper markets which corporations use for short term obligations (payroll!) and to smooth out cash flows, this is actually pretty similar to a credit card on a personal scale.

forgetsusername 11y ago
>Businesses use debt in all sorts of ways, they certainly don't limit it to buying assets. A common use recently is to fund share buybacks You don't think buying a stake in a successful company (in this case one that happens to be your own) is buying an asset? The mechanations are slightly different, but you're still buying shares. An effect is rising EPS (due to retired shares), but that isn't the purpose.
- jonknee 11y ago
  Not at all, it's a giveaway to executives (who get bonuses based on EPS) and long term shareholders. Some firms also borrow money to fund a dividend which is just a literal giveaway.
  - forgetsusername 11y ago
    >Not at all, it's a giveaway to executives (who get bonuses based on EPS) and long term shareholders. Putting aside the executive giveaway (because I have a hard time believing that there are executive bonuses so intertwined with EPS that the company can just burn money on buybacks to increase that bonus without any external fuss or anyone questioning why)... ...who or what else matters beyond the shareholders? Share buybacks aren't a scam. They exist as a method to return capital to shareholders and can be smart or not depending on a variety of financial circumstances. Just like every other financial decision. http://aswathdamodaran.blogspot.ca/2014/09/stock-buybacks-they-are-big-they-are.html http://aswathdamodaran.blogspot.ca/2014/09/stock-buybacks-th...
- ska 11y ago
  but that isn't the purpose Sometimes that is precisely the purpose.
surfearth 11y ago
You're correct that there are a multitude of uses for debt (e.g. working capital management). I do think the parent was on to something though - the cornerstone of the private equity/leveraged buyout industry is borrowing debt below your return on equity to amplify returns. This can be a wise strategy for individuals to cautiously replicate.
usefulcat 11y ago
I can see how a share buyback would put upward pressure on the share price, but how could it have a positive effect on earnings? Seems like it would have to have a negative effect on net earnings over the long term if the buyback was financed via a loan, due to the need to repay the loan.
- chkuendig 11y ago
  Parent was writing about "earnings per share", key word being "per share". So with fewer outstanding shares, this obviously increases.
  - usefulcat 11y ago
    Ahh, ok that makes sense, thanks.
    - jonknee 11y ago
      And EPS is one of the big metrics for share prices (the PE ratio uses it for example). It makes sense that if there are less shares they should all be worth more, but EPS is the reason why that is the case.
newjersey 11y ago
I imagine when you "buy" your supplies and don't pay for them until about ninety days after you took delivery of the supplies, that is considered debt as well? I mean if I want to ship something, Fed Ex will ask for payment up front but when Amazon.com ships something they probably don't actually send the money right away. I am still trying to grasp this concept credit terms. I must add that I have had no training in this field and have basically just skimmed through the soylent blog post http://blog.soylent.com/post/133420708272/pricing-soylent-efficiently http://blog.soylent.com/post/133420708272/pricing-soylent-ef... so in my mind, what we want to do is get the "interest-free loan" from our supplier of equal or greater duration to the credit term we give our customers. I imagine this is a double whammy because suppliers offers better terms when the going is good and become strict when the going gets bad. Now that I think about it, perhaps Apple sitting on a pile of cash isn't such a bad idea after all right? I mean if they have to go through a rough patch again, won't any credit terms they get (banks, investors, or suppliers) automatically be worse? I don't know the rules about financial stuff but my perception is that as public companies there is only so much information you can withhold (and only for so long) without breaking financial regulations (and those regulations presumably exist for a good reason).
- cperciva 11y ago
  I mean if I want to ship something, Fed Ex will ask for payment up front They might ask for payment up front, but they'll quite happily take a credit card instead. Yes, credit cards are a form of transactional debt if you pay them off each month; they allow you to enjoy your purchases for ~ 1 month before paying for them.
  - newjersey 11y ago
    I imagine the credit card payment processor pays at the end of the month? So when one accepts payment using credit card, is that an automatic 30 day credit the seller has extended to me? I didn't think about that. So essentially, the credit card issuer didn't really spend "their money" at all. Wow. The more I learn the more I realize how little I know.

zrail 11y ago

> Debt should be used to purchase an asset that will appreciate or otherwise provide an income in excess of the interest payment on the debt. Full stop. In 2014 only 34% of households carried credit card debt month to month[1]. The majority of households pay it off every month, simply using it to smooth out irregular cash flow while potentially racking up rewards. They're not purchasing an asset, per se, unless you count the rewards and the tiny amount of bank interest they may receive. [1]: http://www.creditcards.com/credit-card-news/credit-card-debt-statistics-1276.php http://www.creditcards.com/credit-card-news/credit-card-debt...

Roodgorf 11y ago
Wouldn't being able to continue your life unobstructed by the need for some potential purchases be an asset in the same way the parent described student or car loans as potential assets? If something comes up outside your usual cash flow, say a tire blows, and smoothing out that irregularity helps you keep your job, I would consider that a worthwhile investment.
- zrail 11y ago
  Student and car loans are not assets. They are debts used to finance assets.
gtk40 11y ago
I don't even think of myself as using debt. I see credit cards as a way to get an extra $50-70 a month in rewards[1] and increase my credit score. I have never paid a cent of interest. [1] I have a card that gives me 5% cashback in gas, groceries, and books up to a limit that does not often surpass what I spend and some rotating 5% cash back cards, in addition to a 2% general spend. I do not pay any annual fees for using the cards.
- zrail 11y ago
  Interesting. What card is this?

yummyfajitas 11y ago

Consumption smoothing is a perfectly valid use of debt. Suppose I have utility = log(consumption), but my income is volatile. If I have 1 income in year 1 but 10 income in year 2, and use no credit, my utility is log(1)+log(10) = 2.3. If I use credit, I can have utility log(5.5 / (1+r)), with r the interest rate. At 10% interest, that's 3.2. At 20% interest that's 3.0. At 50% interest that's 2.6. So even at 50% interest I'm increasing my utility by 10% due to the use of credit.

navait 11y ago
While that's a valid point, the parent was speaking in generalities across most people - given that most people have consistent incomes from wages, do they really need consumption smoothing?
carlob 11y ago
Correct, but a bit misleading. You're taking a person that has income that increases tenfold over a year. For most people the rate of increase of income is smaller than credit card interest rates, and you can really justify high interest rates when you assume that you're going to make a lot of money next year, but then again Steinbeck said that most Americans think of themselves as temporarily embarrassed millionaires :)
- yummyfajitas 11y ago
  Probably "year" is the wrong time period, but lots of people have very volatile income. A consultant can easily have 10x variance in income from month to month. A musician or actor might have 0 gigs one month and 5 gigs the next. Shortening the time period just lowers the financing costs.
  - carlob 11y ago
    True, but still how many broke musicians and actors should be considering this month's zero income a fluctuation and get into credit card debt and how many should just be more conservative with their spending?

bradleyjg 11y ago

I don't think such an absolute position is warranted. It's true that saving up for a big purchase will end up costing you less money than borrowing to pay for it and paying it back. But you will have the item purchased for less time. Suppose you have enough disposable income to pay for a new $1200 TV over the course of 12 months. In scenario 1, you save $100 each month. The bank pays you 0.5% interest. As of January 1st next year you'll have a new TV and $2.75. In scenario 2, you put $1200 on a credit card with a 10% APR. You pay $100 each month towards the credit card bill. As of January 1st next year you have a TV you've been watching for a year already and owe $69. You've essentially paid $72 for the privilege of getting the TV you wanted a year earlier. Is that worth it? Well that depends on a lot of things, some of them intangible, but I wouldn't say it can't possibly make any sense. The sort of Puritan attitude towards consumption and debt may not be the worst attitude to have, at least for oneself. But when combined with evangelism it is pretty annoying.

dragontamer 11y ago
Now suppose you lose your job in Month 10. The TV-less person will continue not having a TV, and use those funds for emergency day-to-day living expenses as he (or she) gets his life back in order. You can even dip into your credit card credit line for an emergency. But the person who bought the TV on interest is in debt, has less credit to live off of, and only a TV to show for it. ----------- In either case, saving up a pile of 6-months of expenses cash-on-hand is a good strategy. If you have 6-months of expenses saved up, you simply buy the TV with that money, and then in a year you put money back into your cash account. Look, now you have the benefits of all strategies! Saving up money for emergencies, or even large expenses (LONG before you even think about those expenses) is the way to go.
- nmcfarl 11y ago
  There’s a ton of comments on this article that I think are much more nutso. But this is the comment I’m going to reply to, cause people who keep emergency funds are probably open changing their mind via reason. Touching your 6 months emergency expenses fund is completely against the point. The reason you have this cash is for out of the blue, hit by bus kind of events. You need it when you least expect it If you take your TV out of it you no longer have it - and this fund becomes nothing more than a general savings account. The kind of thing that drops low right after you buy a TV, or a car, which from my personal experience is exactly when bad things happen. And often bad things require cash on the barrelhead, not just credit cards. So don’t do this. Either save in a slush fund for your TVº, or put it on a credit card, but don’t take it out of your emergency fund and still call it an emergency fund - 'cause it’s not going to be there for you in an emergency. º or my personal favorite: a throw away, but named, savings account. (Like CapOne360, née Ing Direct, offers.)

douche 11y ago

It's pretty numb to use debit cards as opposed to credit cards, for various reasons. A.) You can't over-draw a credit card, and get hit with overage fees or bounced-check insurance, or all the other things banks do - particularly with the slightly nefarious way they often choose to order your transactions when they close their books. Particularly troublesome with businesses that put in a hold on your card, then charge you the actual price, and then refund the hold (like many fuel stations) B.) If you don't get paid weekly, and instead biweekly, monthly, or more sporadically than that, putting all spending that doesn't absolutely have to be drawn directly from your checking accounts on credit makes a huge amount of sense. You can float that tank of gasoline, or your groceries on credit, but when the heating oil needs to get filled, or the rent is due, you need cash in hand, and you don't want to get caught short. More of an issue if you're not paid very well to begin with and haven't got much cushion built up. C.) Buy stuff on credit, collect the reward points, pay it off before the next statement, and you've gotten free money for things you'd have to buy anyway. D.) If a credit card gets stolen and somebody goes on a spree with it, you just dispute the charges with your bank, they issue chargebacks, no real money is gone from your account. With a debit card, good luck, they just vacuumed money out of your real checking account.

pessimizer 11y ago
A) Opt out of "overage fees and bounced-check insurance" which would be the problem here, not debit cards. Keep track of your own finances. B) Don't live check to check. Keep track of your own finances. C) And if you fail to do that once (because you're probably living check to check), you've nullified any free benefit you ever received. D) Horseshit. I had my card stolen by the Target breach, there were charges on it all over Europe, and within a week I had every penny back.
- ethbro 11y ago
  > B) Don't live check to check. Keep track of your own finances. I'm not saying this to be aggressive, but you're missing something in the calculation. http://www.investopedia.com/articles/03/082703.asp http://www.investopedia.com/articles/03/082703.asp

cm2012 11y ago

Eh. I used to make a lot less money than I did now. I got into around $10k of debt, mostly buying "useless" things that made life fun, like ordering in, etc. Now I make 4x what I used to and the debt is trivial to pay off. Debt also makes sense when money is worth more to you now than later.

imgabe 11y ago
Money is always worth more now than later. That's why when you pay back money later, you have to pay back more than you borrowed (among other reasons).
- lotsofpulp 11y ago
  Not in the case of negative interest rates.

theklub 11y ago

Unless of course there is no interest for X months. Then what's the difference, assuming you are smart and pay it off in time.

taneq 11y ago

> Carrying a balance on a credit card is almost never an appropriate use of debt. One exception: Credit cards with those introductory "6 months interest free" clauses. Sign up for as many as you can get, with as large a limit as you can get. Max them all out on payments into a mortgage offset account. Just before the end of the interest free period, pay them all off again. (I've heard of this being done but I'd bet it's a lot harder to pull off these days.)

HeyLaughingBoy 11y ago
I did that about 20 years ago to pay off about 12k of debt I accrued. Basically kept shuffling the debt from one "interest free for 6 months" balance transfer to another until it was all paid off. They are still around today, just not as popular.
rootusrootus 11y ago
Clever idea, but these days I think that would be tough to pull off. Most balance transfer offers come with strings attached, typically something like a 3% fee for taking the money. That is almost as much as the raw interest rate on my mortgage, and might actually be more than the effective interest rate (considering tax advantages).

barrkel 11y ago

Debt is useful to change the time between income and expenses; it solves a cash-flow problem. That's the real key: treat it as a time adjustment in flow, and not as a stock. It's not something you can dip into, as it were; it's something you use to move consumption closer in time, in return for reducing potential consumption in the future. If you're using it to buy an asset that appreciates more than the interest on the debt, what makes you think that you're a better judge of asset prices than the people lending you the money? Why wouldn't they just buy the asset directly, and cut out the middleman? Businesses use debt for all sorts of reasons; cash flow, tax, paying out profits in a different form, or simply because debt is cheaper than equity.

Jtsummers 11y ago
> If you're using it to buy an asset that appreciates more than the interest on the debt, what makes you think that you're a better judge of asset prices than the people lending you the money? Why wouldn't they just buy the asset directly, and cut out the middleman? Because it's not their (core) competency or they don't want the risk. I could start my own company printing indie games. But I have no connections in the industry (well, not entirely true, but none that are exploitable for this), I have no experience running a business, but I do have capital. And someone else who does have those connections and experience wants to start up such a business. Collateral on the loan protects my money (partially) in case of failure to repay, while the risk is mitigated by having someone more experienced doing the work.
- barrkel 11y ago
  Someone working in a company printing (?) indie games isn't an asset, though (except in the accounting sense of the lender, as a stream of repayments; but that's not the perspective that's under discussion - individuals borrowing, not lenders lending). Point being my rationale was slightly different; it includes more things - it's more general - and it's a bit more negative on the idea of simply buying a rent producing or appreciating asset.
  - Jtsummers 11y ago

Outdoorsman 11y ago

Well written... From experience (not mine) too many people consider only one factor when making the majority of purchases with credit: Can I make the monthly payment...? If they can they plunge headlong... Of course just paying the monthly minimum on outstanding credit card balances is disastrous...it's kicking a loaded can down the road...

stvswn 11y ago

That's a good way to use debt, but far from the only rational one. The best reason to use debt is for consumption smoothing. For example -- a car breaks down unexpectedly, and now the owner can't make it to work. They won't get paid if they don't go. "Save up for a repair" doesn't work. This is perfectly legitimate reason to spend now, pay later. It's the canonical reason to use credit. The asset they buy -- a new alternator, or whatever -- isn't going to appreciate. The interest they pay is simply to pay for the service of having money now instead of later. That doesn't mean it's foolish.

grahamburger 11y ago

Or, of course, if the furnace goes out right before Christmas and you don't have any money (except a credit card) because you were laid off 3 months prior and haven't been able to land a new gig yet. That's how I started the year with $700 more in credit card debt.

cynicalkane 11y ago

If you're going to go full economist, the correct use of debt is whenever the expected value of having something now instead of later exceeds the expected lifetime cost of servicing the debt. So it would be very reasonable to take out a loan for a car or a house, especially with interest rates around 4%. It might even be reasonable to take out a loan for furniture or a TV, but fiscally responsible people will usually have enough cash to pay instead, so in practice most responsible people don't take out loans for TVs. By the way, houses historically did not appreciate at high rates. The recent dramatic appreciation in housing prices in big cities is a giant blip in the data. You shouldn't bet on housing appreciating so well, and you shouldn't buy more house than you will use or rent. (If you think the increasing importance of big cities will automatically mean higher prices, ask homeowners in Tokyo how well that's been working for them.)

matthewaveryusa 11y ago

Another reason to take on debt, as an individual, is to leverage your position -- It's indirectly related to provide income in excess of interest payment. An example would be to take on debt to purchase a vehicle to broaden the area where you can potentially work. You have to make sure that you buy a vehicle at the optimal marginal return (so close to a clunker.) and I think that's where the problem resides: I see individuals have possessions that cost way below the optimal marginal return for status.

mrow84 11y ago

My understanding of debt is as the cost of shifting purchases in time, in the same way as barrkel [0]. Working out what the cost is going to be up front only works if you stick to your assumptions throughout repayment, which is a good way of understanding part of the problem with debt - even if you calculate properly against uncertain events for the average case, you as an individual can be caught out by bad luck. Attempting to subsequently solve the consequences of your bad luck with further debt seems to me an instance of the gambler's fallacy [1], and is another important part of the problem with debt. [0] https://news.ycombinator.com/item?id=11135283 https://news.ycombinator.com/item?id=11135283 [1] https://en.wikipedia.org/wiki/Gambler%27s_fallacy https://en.wikipedia.org/wiki/Gambler%27s_fallacy

deleted 11y ago

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matwood 11y ago

I agree with you, but then who would pay for my travel points and cash back?

lossolo 11y ago

If there would be no debt on common products, then there would be no market growth, then capitalism would fail? Isn't that true ?

Shivetya 11y ago

It isn't just credit cards, it is all monthlies. They add up and can catch many people by surprise. Another trap is not paying for small items like coffees, lunches and the like in cash. You lose a mental connection there. Back to monthlies, the big ones are non negotiable and those revolve around your housing. For many the mortgage or rent will be with them for years. So pile on utilities and then comes nearly the near optional monthlies. You get your phone, your internet, your various streaming sites, and more. Then toss a car, credit cards, and then more. How to spot these people, look at ones who shop cars based on what kind of monthly payment they can squeeze up too. If they went over four years its a bad sign, if they went six plus, well end of story. Oh, one last note. Track your food purchases, all of them from grocery to on the go. You might be surprised

kulkarnic 11y ago

This is factually incorrect, in addition to being bad advice. You take on debt when the net present utility of the purchase is greater than the price of the debt. Here's a simple example to illustrate: you have an interview tomorrow, and you want to buy a suit to be sure you are appropriately dressed for it. The net-present-utility of the suit is quite high -- not having one may cost you the job opportunity. On the other hand, a suit is a depreciating asset. It is also not an income-generating asset (i.e. you may sell the suit the day after the interview at no loss of income.) Using the reasoning of "debt for appreciating/income generating purchase" will preclude you from buying this suit, sensible though the purchase is. PS: in an ideal world, you'd rent the suit, or any asset that has only temporary utility and pay depreciation+premium. http://john-joseph-horton.com/papers/sharing.pdf http://john-joseph-horton.com/papers/sharing.pdf

alecco 11y ago

Just appreciating is not good enough. You have to compare it to getting a safe investment paying market interest. http://www.investopedia.com/terms/i/irr.asp http://www.investopedia.com/terms/i/irr.asp http://www.investopedia.com/terms/n/npv.asp http://www.investopedia.com/terms/n/npv.asp Unless you take some utility of the appreciating asset, you should always go for the best investment.