3 Types of Debt You Never Want to Have

Debt is an issue for many people, but these three types of debt can take a much bigger bite out of your lifestyle.

Aug 24, 2014 at 1:00PM

Debt is a problem for many Americans, but some types of debt are much more harmful than others. Knowing which types of debt are most harmful to your finances is important when it comes to controlling interest expenses and keeping debt under control.

Payday loans
When it comes to interest rates, payday loans are about as bad as they get. Annualized rates can easily move into the triple-digit range, sometimes moving as high as 500%. On top of that, payday loans come with extra fees that increase costs for borrowers even more.

Payday

Flickr / taberandrew.

If these loans are used for the short term, they still cost more than other lending options, but the cost is not as much as if they were used for an extended period of time. However, for many individuals, this is not the case. According to the Center for Responsible Lending, "The average payday borrower has nine transactions per year." Moreover, "Loans to non-repeat borrowers account for just 2% of the payday loan volume."

Although payday loans can seem like the easy solution to covering expenses, there are many better alternatives. Many community banks and credit unions offer short-term loans to cover expenses and do so at rates far better than payday lenders. Some borrowers may also want to consider borrowing from friends and family if it's only for a short period of time. Even though it may be a hassle, few friends of family members will charge triple-digit interest rates.

Credit card debt
There are situations where credit cards are a financially beneficial tool, but credit card debt is among the worst things to carry over time. With many credit cards nearing a 30% interest rate on carried balances and most others carrying at least double-digit interest rates, these debts grow quickly if not paid off.

Credit

Flickr / Sean MacEntee.

Consider also that getting rid of credit card debt is a good financial investment. By paying down this debt, you would effectively be earning up to 30% per year on the debt paid down. Even famed investor Warren Buffett is proud of earning an average of 20% per year from his investments.

Credit card debt can arise from a number of scenarios, but too often it comes from irresponsible spending and a pay-it-off-later attitude. While not as expensive on an annualized interest-rate basis as payday loans, credit card debts pile up fast and can lead to much greater expenses down the road.

Unpaid taxes
Few people like to pay the taxman, but not doing so can land you in another heap of financial trouble. As it turns out, the IRS wants what it's owed and is ready to act accordingly.

Through a sea of penalties and interest, those who don't pay their taxes on time and in full can see their debt to the IRS skyrocket. In fact, the IRS even admits that in certain cases, "The interest rate on a credit card may be lower than the combination of interest and penalties imposed by the Internal Revenue Code."

Taxes

It's also important that you file your tax returns even if you can't pay in full. Not only can refusing to file a tax return potentially increase penalties but, in some cases, it can also make obtaining loans more difficult. The IRS also notes that it may create a substitute return itself for those who haven't filed. But before you think this means less work for you in preparing your taxes, when the IRS writes up the return, making sure you get all your exemptions and deductions is not exactly top priority.

Refusing to cooperate can also lead to the beginning of the collection process, including levies on wages and notice of a tax lien.

To avoid this issue, you may want to consider setting aside money, especially if your employer isn't withholding enough. And if you already know you can't pay your taxes, still make sure to file your return and get in contact with the IRS.

Bad debts
As many Americans struggle with debt, it's important to know which debts are the most harmful. With all their fees, penalties, and high interest rates, payday loans, credit card debts, and overdue taxes are three types of debt to avoid whenever possible.

But for the times when there is a cash shortfall, be sure to consider alternatives. Contact a local bank or credit union or even friends and family. And most importantly, don't just push the debt off until tomorrow unless you want to pay even more.

Take advantage of this little-known tax "loophole"
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers