Understanding the Basics: What is Debt

What is debt?

Debt is one of the most important things in the financial world. So what is it? In simple terms, debt is borrowing money that you have to pay back. The catch? you have to pay a little extra back. Think about it like asking your friend to pay for a meal. If the meal is $10, you might have to pay him back $11. That "little extra back" is called interest. Debt works in the exact same way!

How do people get in debt?

There are a couple of ways people can get into debt. First, when people need a lot of money for something, they go to a bank and ask for a loan. A loan is a sum of money that a bank gives out to help people. In return, the bank will ask for a percentage on top of what they are already owed. For example, if someone borrows $10,000 from the bank to pay for a car at a 10% interest rate, you will owe another $1000 back to the bank on top of your $10,000.

What are Credit Cards?

Imagine you had a card that had an unlimited amount of money. Seems pretty cool right? Well, the thing is you have to pay that money back. A credit card is basically money that gets loaned to you for every purchase. So, if you buy breakfast or a new baseball bat, you're getting loaned that money to make those purchases. Every month, you get a bill in the mail for how much you owe on your credit card. There are 2 ways to pay back these loans. you could either pay all of it back for that month, or you can pay a fraction of it and then have interest on the rest of it.

Good debt vs. bad debt.

Debt is a double edged sword. Depending on how you use it, debt can be really good for you or really bad for you. First, debt can be good because it can help you afford big purchases like going to college. Another way that debt can be good is by building your credit score. If you pay back your debt on time with not problems, your credit score will increase. Why does this matter? If you have a high credit score, your loans will likely have lower interest rates. A credit score of around 700 is generaly deemed a good credit score. Without a good credit score, it's hard to buy a house because you can't put down a big enough amount of money when you first purchase the house.

On the other hand, if you get caught up in it, debt can be terrible for you. Let's start with credit score. If you struggle to pay back your loans, your credit score will get hurt. As a result, banks might not be as willing to give you a loan. Also, if the interest keeps building on itself it will get to expensive for you to pay back. And even worse, if you can't pay back you could lose everything. You could lose your car, all your money, or even your house.

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