Can you imagine being a credit card company, getting 20 percent in interest returned on the money you’re lending out? Or is it easier to imagine being the payer of that 20 percent interest?
I’m guessing it’s the latter than the former.
Personally, I do my best not to use credit, never having had long-term credit card debt or a vehicle loan, and having paid off student loans and a mortgage faster than necessary. Credit is one of those gifts that I’d just rather give than receive.
Credit stats to open your eyes
An infographic on creditloan.com puts the average American’s interest payments on debt at $600,000 over the course of a lifetime. It goes on to note that, “According to recent figures, the average debt is almost $27,000 for a four year degree. This number is even higher for graduate students, with master’s degree students taking on an additional $17,000 in student loans and doctoral students $29,000.”
And maybe an even more surprising statistic from creditloan.com is that, “Auto loans average $30,738 worth of debt and continue to increase as the loan length increases. The average mortgage is now $230,000 and continues to increase…” and “After 30 years of making payments, a homeowner with a $240,000 mortgage loan will have paid over $580,000 on his/her house.”
Knowing that simply using someone else’s money can be one of the greatest expenses in our lives, our family has made it a goal to utilize our own money for purchases whenever possible as opposed to taking on debt.
Infographics like those on creditloan.com can be helpful in gaining perspective on debt, but there can be more to it than that. Using debt calculators or future value calculators can provide a better understanding of just how credit can work both for you and against you.
Seeing how credit as debt on your end can change based upon various amounts, interest rates, and timeframes can illustrate how these debts can add tens or even hundreds of thousands of dollars to the cost-of-living over time. However, on the opposite end, you can use such calculators to see how investments (in essence, lending your money as credit to others in return for interest or dividends) like savings accounts, savings bonds, certificates of deposits, money market funds, mutual funds, and similar savings vehicles provide the inverse relationship when it comes to credit.
Certain, more specific calculators like mortgage calculators, amortization schedule calculators, or calculators geared toward particular types of debt situations can be helpful in this aspect of better understanding debt as well.
Using knowledge and tools to your advantage
So okay, with the ability to figure out how credit works and can be manipulated, how do you use it to your advantage? Well, as I’ve already mentioned, my own family has used our understanding of credit to harness its ability to create money, or at least save it rather than drain it from our coffers. For example, using an amortization schedule to determine how much we would pay in interest over time — and how those interest payments would be broken down — helped us determine how to make extra payments toward our mortgage to cut the effects of interest. In essence, we removed tens of thousands of dollars in interest payments simply by understanding how a mortgage payment works and is divided between interest and principal.
We’ve used a similar tactic in our most recent home purchase, buying a downsized condo outright in order to avoid a mortgage that, at a 30-year fixed rate — and with a 20 percent downpayment — would likely have cost us $88,000 in interest over the course of the loan.
Therefore, understanding that in many cases, credit is something that is better given than received can be instrumental to saving more of that hard-earned money.
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The author is not a licensed financial, real estate or credit professional. The information provided in this article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.