Moving Debt Is Not The Same As Paying It Off
I’ve been thinking about the following for quite same time. When I tell people that I write about debt reduction – they inevitably tell me about their latest ‘get out of debt’ plan. Usually, those plans revolve around one of the following techniques. Unfortunately, most of these people never actually manage to reduce their debts. In fact, most of them inevitably go on to add to their debts. Why? Because, moving debt is not the same as paying it off!
1. Use home equity to “pay off” credit card and automobile debt.
Ah, the old standby. What do we do, when faced with a mountain of high-interest credit card debt? I know! We roll that debt into our home loan and we “pay if off”. You’ll note, if you read many of my articles, that I can go a little crazy using quotation marks. But, for today’s 1st point, quotation marks are quite appropriate.
When you roll your credit card debt into your mortgage – you aren’t “paying off” anything! You are simply moving debt. And, moving debt doesn’t get rid of it, any more than moving a bowl from one cabinet to another gets rid of the bowl!
2. Transfer credit card debt from multiple cards to one, low-rate card.
They come in the mail, everyday. Low-rate credit card offers are enticing – and they can be useful. But, again, moving debt is not that same as eliminating debt. While a lower rate is always preferable to a higher one, beware of balance-transfer offers. I cannot overstate the importance of understanding all of the details of the transfer. There may be hidden fees, a very short period of time during which the low-rate is actually applicable, and super-high rates associated with the account, once the low-rate period is over. Also, if you move a balance from one card to another, be sure that you don’t rack up new charges on the old card. If you do that, you’ll have a balance on two cards!
3. Borrow money from friends or family members to pay off debts.
This one might get me in a bit of trouble. But, money that is borrowed should be paid back, whether the creditor is a bank, a mortgage company, or a favorite uncle. While there isn’t anything wrong with borrowing from friends or family members – as long as the terms of the loan are understood by all parties – these types of arrangements have a strange way of turning sour. If you borrow money from mom, and it’s clear that the money isn’t a gift, pay it back.
4. Borrow money from a retirement plan to pay off debts.
I’ll be honest, I don’t know much about retirement plan loans. But, from everything I’ve ever read, they don’t sound like a good idea. While the idea of ‘paying yourself back’ sounds nice – the debt isn’t going away, it’s just being moved. And, if you couple a retirement plan loan with spending and budgeting habits that have not changed, you will be headed for even more financial pain.
5. Paying off one debt while incurring another.
If you owe $10,000 in credit card debt, and you pay it down to $9,000, that’s great! But, if at the same time, you charge $1,000 on another card, that’s lame. I can hear some of you. NCN, who does this? Lots and lots and lots of people. I’ve seen people really focus to pay off a credit card balance – only to go to the furniture store and furnish their homes with thousands of dollars worth of 90-days-same-as-cash furniture.
Instead of focusing on gimmicks for ‘paying off’ debt – may I suggest that you buckle down, create a real debt-reduction plan, and REALLY get out of debt? There are no short-cuts. Getting out of debt takes three things – money, a plan, and determination. If you have those three, you can get out of debt. If not, you’re just moving debt around.
For help in developing a debt reduction plan, you may want to read this article I wrote a few months ago – (Almost) Everything I Know About Debt Reduction.