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.


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.


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."


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.

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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.

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