Aug 10, 2012
Household debt: Not always a bad thing
10 Aug 2012
Posted by Andrew Kantor
The unparalleled Becky Tippett of UVa’s Weldon Cooper Center for Public Service has an excellent piece about personal debt — how it’s not necessarily a bad thing, despite some knee-jerk reactions to it.
First of all, she points out, the fact that Americans have less debt these days isn’t necessarily a sign of us getting smarter about our finances.
Our increased thriftiness is not necessarily a sign of changed attitudes and behaviors (although rising frugality has played a role), as much as changed circumstances. Defaults on mortgages and other loans in the aftermath of the recession have removed many debts from household balance sheets.
The easy credit of the early 2000s—offering 18 year-olds free t-shirts and pizza in exchange for opening a credit card account, for example—has ended. And, unemployment and declining wages have reduced the creditworthiness of many households.
Then she explains how it’s not so simple to say (with all due respect to The Hulk) “Debt bad!”
When talking about household wealth, we typically define wealth as net worth, or assets minus debts. Since assets, much like income, are good, and the more the better, debt must be bad, right? Again, it’s not that easy. First, to get debt, you typically need to have credit, which, like wealth and income, is universally pretty good.
Smaller, regular payments spread over time may be more manageable than one lump-sum payment, and the amount of interest paid may be well worth the benefit of keeping a larger stock of savings in reserve for emergencies.
As a big believer in “things are rarely as cut and dried as they seem,” this article is a must-read piece, if only to plant the seed that running a tab doesn’t make you a bad person.