The Way We Think About Debt

Mike: One of the things we examined this week was what debt means to us as individuals. What should we think about when paying it off? There is no one right answer, of course, because debt means something different to each of us. So let’s talk about this. Logan, your debt is all consumer, right? You don’t have any student loans.

Logan: Yes, mine is consumer debt. Consumption. Ha. Yes. But it is an interesting division. Does the kind of debt matter, psychologically? When I had a car loan, I thought about that debt differently than I thought about my credit card debt.

Mike: How so?

Logan: I’m not sure. I didn’t think about the car debt, at all. So much that when I was adding up my debt last year, I had to be reminded to factor in it. To me it was another bill. But the credit card debt totally felt like this disgusting black cloud. DARK. TERRIBLE. DANGEROUS.

Mike: Maybe it’s because the car is something you needed and were happy to pay for, while your consumer debt was mostly a bunch of stuff that you wanted, but could have survived fine without. I feel that way about my student loans. I’d probably freak out about credit card debt and would want to pay it all off ASAP, but with my loans, they’re there, I pay them every month and don’t really think about it. My interest rates are pretty low and the interest accrued adds up to less than $2,500 a year, which is the deduction limit for student loan interest come tax time. Anyway, that’s boring tax talk, but what I’m getting at is that I’m not too worried about it. I know they’ll be paid off by the time I’m in my 40s—possibly sooner. And in the meantime, I can live pretty comfortably.

Logan: The car was a decision made with a sound mind, and it’s a decision that I didn’t have to validate or feel bad about. I needed a car, I bought a car, I got insurance, I made my payments. It was a good car but a modest car. The payments were reasonable. There was no sense of, I’ve really screwed myself here (though there were months when, sure, I bemoaned my month payment and thought, I’ve really screwed myself here!). The credit card debt was different in that it was a lot of tiny decisions that I validated at the time (I deserve this dinner out, I need this haircut to feel better about myself) but added up were not so easily defensible. “I spent $20K to make myself feel better,” just doesn’t work the same way, “I spent $20K to get to and from work” does. Sometimes I’ve toyed with the idea of thinking about it almost like a medical debt. I spent that money on regular sessions with a not very good or effective a therapist, called dinner and a bottle of wine.

Mike: But you also don’t feel the need to pay it off ASAP, right? I mean, the way I’d feel about it, or the way Lisette and her partner have decided to tackle it so aggressively. I don’t think I would tackle it as aggressively as they did/are, but I do think I’d make paying it off a priority.

Logan: Well, there was a time when I for sure felt like I had ruined my life by racking up this credit card debt, and that I wouldn’t be able to “start my life” until I paid it off. I’ve since changed my mind about that, mostly. I don’t feel ashamed about it anymore, mostly. But I didn’t ever feel that way about my car debt. I didn’t feel like the car payment held me back in the same, way, psychologically. Even though the payments, well at least for a long time, was pretty similar. I think it has something to do with the fact that interest rates on the cards are high, and so there’s this sort of feeling that I can’t save any money, that I need to pay off the cards first. But … I also don’t want to not spend any money? So in my head, it’s always been, pay bills, live, pay off cards further with extra if there is extra (the only time I’ve managed to have “extra” is when I’m close to paying off a card and just want it gone!), and then ONE DAY, I’ll save for …. something.

Mike: It’s all about finding that balance and whatever will work for you to reverse that debt back to zero. I think it’d be unrealistic for you to go from charging things without thinking about it to magically breaking all your bad habits and focusing all of your money to get your credit cards paid off. But I also think it’s fine for people to want to do that—to go through a period of misery in pursuit of some bigger goal in mind. I think about my parents—how when they were my age, I was already old enough to start school. And I think about how we lived in this awful one-bedroom apartment together—my family of five—for a few years until they had saved up enough money for a down payment for a house. I don’t remember it being so miserable, but I’m sure it was for them. They made it seem like we were one big happy family in that single bedroom, but I’m sure in the back of their minds, they were like, “The kids need their own rooms! We need our own space!” And then I was in third grade, and we had a house, and a backyard, and all that temporary misery was worth it. So, I don’t know why Lisette and her partner are putting themselves through hell while shedding their debt or what their end goal is, but I do have an understanding of why people do it.

Logan: I used to wish I was the kind of person who could do that, I used to daydream about moving somewhere and doing a job—oil fields! cruise ship dishwasher! I don’t know—where I’d work all the time and have zero places to spend money and I’d just do it for a year and then I’d pay off my debt and I’d start fresh. I do like the idea of starting fresh. But it’s not something I’m actually interested in doing. And to people who are? Bravo.

Mike: Bravo, indeed. Bravo to anyone who figures out the thing that works for them when it comes to debt (or savings, or just living, basically).

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11 Comments / Post A Comment

Chel (#2,960)

I have car loan debt and credit card debt and plan to pay both off this year. But I haven’t tried to pay the car loan down any faster than scheduled. I have stressed about it, it’s my biggest monthly expense after rent, but it is something I need in the city I live in.

I am looking at taking out student loans this year to go back to school. I had a small government loan from my first (failed) attempt 13 years ago that I paid off within a year so I have been stressing about this. When I was in high school and they gave me the papers to sign I didn’t give it a second thought, but I have been freaking out since you hear so many horror stories about student loans. I think I need to take Mike’s approach on that.

It also hadn’t occurred to me that student loan interest is tax deductible. Too bad it is too late for me to amend my returns from when I paid off the first loan. But that realization makes me feel so much better about it. Thank you.

deepomega (#22)

I think also, with a car payment you’re paying down a monthly amount that WILL pay it off. Eventually. This is not the case for minimums on credit cards or school loans!

OhMarie (#299)

I feel like a debt-free person now, since I don’t have credit card debt and paid off my student loans, but my husband and I bought a house a couple of years ago and the fact is that we are in an amount of debt that would seem CRUSHING if it was anything else. Debts are totally, completely different depending on what they are.

I really think the type of debt makes a big difference. I freaked out over my student loan until it was paid off (maybe because I borrowed way more than I had to in order to have a sweet student life? Don’t borrow to live!). But my husband and I just bought a house (yay!) and looking at that enormous number we owe is like, oh, no big deal. I mean, compared to many home loans it’s tiny – but it’s still the biggest debt either of us has ever had. We’re stoked to have it, though!

sockhopbop (#764)

I totally think the type of student loan debt can make a big difference too. In retrospect, I wish that I hadn’t gone to the grad school I did for the degree that I picked, so my student loans are kind of my archenemy. But if I felt like Mike about my student loans–that they were a necessary expense to get my career where I wanted it to go–I think I’d be much more at peace with them.

CubeRootOfPi (#1,098)

I do think that the type of debt makes a difference. If it were a mortgage, I’d feel the same way that Mike does about his student loans because I need a place to live and but for the mortgage I’d be paying rent instead. Otherwise, I’m a less extreme version of Lisette (even did the Netflix calculation, but decided to sign on) – debt is an expense, but it’s an expense I can and must get rid of.

lizard (#2,615)

i think that having something tangible for a debt like a car or house is easier because you are actually using it everyday. a school loan is sort of just floating there and if you dont have a career in that field its just floating there building animosity and resentment

Megano! (#124)

There is actually a difference between types of debt — things like mortgages and student loans are considered good debt because they’re ultimately an investment. Consumer debt is bad debt b/c it has no value. Almost any financial advisor will tell you to pay off the bad debt first, b/c it’s way more harmful to your credit score, and is valueless.

josefinastrummer (#1,850)

@Megano! I carry debt on my credit cards and I have excellent credit. Financial advisors like to scare people that if you carry a balance, you are in trouble and that’s just not true, so long as you pay the minimum every month. I think they do this so you will invest more with them, and they reap the benefits.

Harriet Welch (#127)

@josefinastrummer
You can have good/excellent credit and carry a balance. The difference is “secured” and “unsecured” debt. You can have an excellent credit score, but your debt to income ratio can still affect your credit-worthiness. Financial advisors typically advise paying off “bad debt” (unsecured debt) because it does more negatively impact your credit-worthiness than “good debt” (secured debt), though it may not negatively impact your score.
Typically, having unsecured debt helps you get more unsecured debt. Carrying a balance on your credit cards and paying them regularly will make your credit score excellent.
Secured debt will help you get more secured debt (house/car). Because those payments are typically higher than standard credit car payments, it demonstrates your ability to consistently make large monthly payments.
Unsecured debt can interfere with you getting secured debt. Financial advisors advise paying off unsecured, “bad” debt first for a myriad of reasons. Not the least of which is that the interest rates are typically much higher. If you are looking at buying a house or a car, a lot of open lines of credit will affect your debt to income ratio and while your credit score is good, your credit worthiness is not as good. When I used to work in auto finance I would tell people to go pay off a small credit card and come back in a week, their score wouldn’t change that much, but it made the difference between first tier and second tier financing (interest rate) and even whether or not they got approved.

josefinastrummer (#1,850)

@Harriet Welch Very interesting, Harriet! Thanks. I had that credit card debt when I had no reported income at all and I was still okay. Once I started waitressing, I was approved for a loan right away but from a credit union. I am done with banks and I don’t see myself needing a house or car loan anytime soon.

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