Financial Fiction Friday #15
When to Fret Over Consumer Debt
First things, first: this is actually a really good thread of suggestions on how to improve your day-to-day finances. Of nine suggestions, I only take issue with one. I think it's ok to have some professional disagreements and still recognize this person's excellent advice overall.
I think it is too much to say all consumer debt is bad and only mortgage or real estate debt is ok. Debt (of all kinds) is a tool and when used correctly it can have a positive multiplier effect.
One vital factor is credit score. If you have good credit, you can unlock low rates which can make debt more useful and beneficial. If your credit score is low, it will be harder to make debt work for you and you will be better off minimizing debt until you can lift that score.
Example: Friends had to replace their HVAC system and although they could afford to do it out of pocket, they elected to finance because they were offered 0.9% financing for 3 years. With inflation at ~8%, this is essentially free money. They also felt that they have an emergency fund capable of backstopping this choice. Meanwhile, this allows them to continue to put investments to work and fund additional home improvements out of pocket. Had the rate been higher, the choice might have been different, but in this case, it was a simple matter of weighing the 3-year return on their money in the market vs paying in a lump sum.
Is this the right choice? Not for everyone, but it is a prudent option and can't be waved off entirely as a trap. I disagree with blanket advice since so much of personal finance is situational.