The Porch Light copyright by Revka (2006-2010). All rights reserved.

Friday, June 22, 2007

Eliminate debt

Did you know that not all debt is created equal? There is smart debt, and there is stupid debt. Credit card debt is nearly always stupid debt, for you are borrowing money for a purchase that will not even hold its value, let alone appreciate. Smart debt is money borrowed for something that will increase in value. A mortgage would normally be classified as smart debt. Student loans and car loans could also be smart debt. Weigh your options a very carefully before applying for a student loan or a car loan. (The rest of this paragraph was added after the inital post to clarify my point of view.) Carefully, I say, because the moment you owe more than your car is worth, that instant the car loan becomes stupid debt. If you rack up student loans to obtain a degree you never use, that could also be stupid debt.

What happens when you are overwhelmed with debt? Consolidation may be an option for you. With the ever increasing cost of a college education, most people see no other option but to get students loans . Student loan consolidation may be a wise choice if you are drowning in student loan debt. It is possible to end up with a lower interest rate and lower monthly payments when these loans are consolidated. Shop around and read the fine print.

Consolidate credit cards by transferring balances on high interest cards to cards with a low (or no) interest rate. Make sure you close out the accounts that have a zero balance. This will prevent you from charging on those cards again. Simply cutting up the cards is not enough. Call the credit card company; tell them to close the account, and ask them to report it to the credit bureaus as having been closed at the consumer's request.

Having worked as a mortgage loan processor, I don't recommend refinancing your home to consolidate debt. Too often, the people who do this use the equity in their home to pay down or pay off credit card debt only to go right back and run their credit card balances through the roof. They end up losing some, if not all, of the equity in their home and find themselves in even greater debt than before the consolidation. Some people have even lost their homes this way.

Of course, the best way to defeat the debt monster is to resolve to add no new debt and to faithfully pay off debt each month. If you have balances on multiple credit cards, others have suggested paying off the card with the lowest balance first. This will give you a feeling of accomplishment. Then, take the monthly amount you used to pay toward that card and add it to what you normally pay on the card with the next lowest balance. When that one is paid off, add the monthly payment from both paid-off cards to the card with the next lowest balance, and keep repeating the process until the debt is gone. Don't think that when one card is paid off you can take the money you would have paid on that card and blow it on yourself. That won't help you.

Follow the advice of wise financial counselors. I like Mary Hunt (of Cheapskate Monthly fame), Dave Ramsey (Financial Peace University program), and Larry Burkett (Crown Financial Minstries). All three are Christians whose counsel is based on Scripture. As many can testify, their plans work. Whatever you do, if you are overloaded with debt, get help.


MInTheGap said...

I'm in the "No Debt" camp, myself. I will be out of all debt but my house in less than 3 weeks. I will say it's ok to get a mortgage, but you should be able to save for everything else.

Revka said...

Hi, M! It's good to see you here. I couldn't agree with you more. We only have a car payment and the house payment, and I can't wait to get rid of the car payment. I find that the unwillingness to say no to self is often what gets us in trouble in the first place. What do you think?

MInTheGap said...

I'm definitely in agreement there. Society has taught us that we can "have it now" and downplayed the fact that it took our parents a long time to accumulate what they have.

Then they add on the deals and cash back-- it really is a slick way to get you in a trap where you have to pay them.

The New Parent said...

Hi R--some solid advice. I don't carry debt like credit card debt and it has always made economic sense.
Culturally we're taught to spend at such an early age, so I can understand why people fall into debt.

Revka said...

M and Frank, I was thinking the same thing as you guys. Children grow up getting just about anything they desire. The parents think they are loving their children, but, instead, they are teaching them to indulge self. Few people want to lower their standard of living when they leave home, and the only way to have all the "things" their parents have is to "buy now, pay later."

Another fact that bothers me is that credit card companies intentionally target young people, and I believe they do so because they know that most of these youngsters do not know how to handle money and will keep swiping the card until it is maxed out and they are over their heads. The credit card companies laugh as they enslave yet another person in the chains of compounding interest, knowing that when the debtor makes only the minimum payment, they (the company) are ensured a steady stream of income for years to come.

I would like to see parents teach their young children and teens about money: to respect it, the way to use it wisely, how to aviod problems. Unfortunately, it would appear that even the parents do not know how to do this.