What is Debt?
"Of course, no one is perfect, and sometimes your outflow
may exceed your income."
- Lorayne Fiorillo, author of
Financial Fitness in 45 Days
Debt is basically owing someone else money you previously
borrowed. In the case of a financial institution, you agree
to pay the borrowed amount back in full over time, as well
as interest. Banks and credit card companies make money on
the interest you pay back.
The longer you take to pay back the loan, the more interest
they charge, and the more money the bank makes. Interestingly
enough, if you pay off your debt in full each month, you're
more likely to see your annual fees and interest rates rise
in the future. That's because the bank has to find some way
to make money from you.
The other Catch-22 is that, if you don't use your line of
credit, you'll never establish a payment history--which is
used to determine if you're creditworthy down the line for
major purchases you can't pay off in one month's time, such
as a car or a house.
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