If you've found your way here, undoubtedly it's because you're curious about debt; and possibly getting out of it. And if you've also been looking on YouTube, you have seen some videos by amateur economists saying you can't have a functioning economy without debt. The way I see it, there are two types of debt:either Purchase debt, or Productive debt. I'm sure economists and financial geniuses have other words for them, but that's what I call them.
Purchase Debt
Purchase debt is the exchange of credit (the value of your good character) for goods; credit cards or loans (business or personal) are examples of these. Think of using your credit card as having the Credit Card Company co-sign a loan for your meal, they vouch that you're good for the money and pay on your behalf.
Chattel loans, like mortgages or car loans, are secured credit loans. The lender (bank, lending company, Vinny the Lump on the corner) lends you the money based on your credit but hold on to the title for security. If you can't make the payments like you promised you would, the lender takes your collateral, sells it and comes after you for the rest. In the case of credit cards, the Credit Card company just ruins your name (financially speaking).
Productive Debt
Productive debt is the exchange of goods for services; bartering or a paycheck are good examples of that. The exchange of effort for money (currency, credit exchange notes, Federal Reserve Notes, what have you); think paying for a meal in a restaurant. This is what really drives the economy. This requires the ability to determine what is immediately necessary, what is necessary, and what is nice.
Purchase Debt
Purchase debt is the exchange of credit (the value of your good character) for goods; credit cards or loans (business or personal) are examples of these. Think of using your credit card as having the Credit Card Company co-sign a loan for your meal, they vouch that you're good for the money and pay on your behalf.
Chattel loans, like mortgages or car loans, are secured credit loans. The lender (bank, lending company, Vinny the Lump on the corner) lends you the money based on your credit but hold on to the title for security. If you can't make the payments like you promised you would, the lender takes your collateral, sells it and comes after you for the rest. In the case of credit cards, the Credit Card company just ruins your name (financially speaking).
Productive Debt
Productive debt is the exchange of goods for services; bartering or a paycheck are good examples of that. The exchange of effort for money (currency, credit exchange notes, Federal Reserve Notes, what have you); think paying for a meal in a restaurant. This is what really drives the economy. This requires the ability to determine what is immediately necessary, what is necessary, and what is nice.
Eliminating Debt
Eliminating debt to have more money in your pocket (to save, spend, roll around on your bed in) is BAD,BAD, BAD! Or so lending companies would have us believe. I think that this is a show of smoke and mirrors. The only ones that benefit from the general public being in debt are the lenders. Not only are you on the hook for the principle, but they hope you NEVER pay it off; if you don't, they can collect interest indefinitely. The best thing you can do for yourself is eliminate all Purchase (or Consumer) debt. But how? The simple answer - whatever it takes. Cut out luxuries, reduce unnecessary services, diversify your income, or consolidate debt SMARTLY.
Example:I have a friend who has chosen to get rid of her five - FIVE! - credit cards by transferring the balances to a line of credit. That's five cards at 12-20% down to 3% on a line of credit. Great! But it only works if : 1) she acknowledges that interest automatic payments will go up because the principle has increased, and 2) ALL PAYMENTS that were being put against the credit cards is put against the principle of the line of credit.
The reality is economies function because the free market allows. In countries where the economy is government controlled, a free market forms naturally in the shadows; the black market.
We don't need to live our lives in constant fear someone will knock on the door.
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