Understanding Debt

Debt is money you borrow now and agree to pay back later, usually with interest. Interest is the fee a lender charges for letting you use their money, shown as a percentage of what you owe.

If you borrow 1,000 dollars at 10 percent interest for a year, you pay back the 1,000 plus about 100 dollars in interest. The higher the rate and the longer you take, the more the borrowing costs.

People often sort debt into good and bad, but the honest version is about cost and what the borrowing buys. Debt is more defensible when it is cheap and pays for something with lasting value, and more draining when it is expensive and pays for something that fades fast.

• A low-rate student loan or mortgage funds something durable, like an education or a home.
• High-rate debt for everyday spending tends to cost the most and leave the least behind.
• No debt is automatically good or bad. The rate, the terms, and the use all matter.

APR stands for annual percentage rate. It is the yearly cost of borrowing, including interest and certain fees, written as one percentage so you can compare loans fairly.

Many debts, like credit cards, let you pay a small minimum each month. Paying only the minimum keeps the account in good standing, but most of your money goes to interest, so the balance barely shrinks.

A 1,000 dollar balance at a high rate, paid only at the minimum, can take years to clear and cost hundreds of dollars in extra interest. Paying more than the minimum, whenever possible, is how the balance actually comes down.