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Debts and Deficits

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• Part 2: How Bad Can It Get?

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Part 1: What Is Debt?

Someone who owes more money than he or she can pay all at once is said to be "carrying debt." A debt is what a person or thing owes another person or thing.

Here's an example: If your friend gives you something even though you haven't paid all the money that you owe for that something, you owe your friend a debt. If your friend gives you something worth $20 and you pay your friend only $15, then you owe your friend $5. That $5 is the debt that you owe your friend.

The more money you owe other people, the more debt you have. The more debt you have, the less people will want to give you things without your paying full price for them.

A prime example of this is a bank. Things that cost lots and lots and lots of money (like houses and cars) will generally not be bought entirely with cash. It's far more likely that you the car-buyer or house-buyer will have to borrow money from a bank (or a friend) in order to buy that house or car. The money that you borrow is your debt.

Most banks will be only too happy to lend people money because the banks will charge interest on the loans. In exchange for getting the money you want to buy that house or car, you are agreeing to pay the bank some extra money in the end. So, if you want to buy a $1000 car but you have only $800, then the bank can loan you $200. That $200 is your debt to the bank. The bank will probably charge you interest on that loan. In the end, you'll pay more than $200 for that $200 loan.

A bank loan is one form of debt. Another form of debt is a credit card account. The very name credit card suggests that you don't have enough money to pay for whatever you use the credit card to buy. You get what you want, and you pay for it over time, including interest, just like a bank loan. You can pay a little a month, or you can pay it all back once you have the money. Most people pay the money back a little a time. Banks like credit card accounts because people always end up paying more than the original price for an item and the banks get that extra money in the form of interest.

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