Debt Reduction

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.

9 thoughts on “Moving Debt Is Not The Same As Paying It Off

  1. Sounds like The Sun’s Financial Diary personal motto. I unsubscribed from him because of this. I don’t need those kind of ideas in my head.

  2. This is SOOOOO TRUE!!!! I can’t count just how many times I have tried to explain to various people that they didn’t really “pay off” debt. They only moved it around. Paying off debt is when it is truly GONE FOR GOOD!!!

  3. 100% Agreed. This is what the problem is? Getting a new debt to pay the older one. This is a very good post, keep posting new things about finance.

  4. We’ve spent years shifting debt around on 0% interest credit cards and just recently decided we were done. Done I tell you! (Well, ok, not yet).

    Since we had such a great rate, we consistently racked up more debt. I’m not sure we ever felt we were “paying it off” but it just seemed to sort of disappear from our radar when on 0%.

    Now, we’re on a path to paying those dumb debts off. After years of doing this and not really communicating about it I can now feel relief every time we get one of them paid off.

    We’re still doing the “0% shuffle” until we can pay them off, but to see debts actually go away is a great feeling. I can’t wait until we’re debt-free (except for mortgage)

  5. We paid off all unsecured debt last year ($55,500) and I regret not looking into #2 (lower interest credit cards). I never thought about transferring debt or even calling to see if we could get lower rates. #5 the first couple months of 2008 we have been on a spending bug, I think we delayed so many purchases last year that we had some real pent up needs and wants. I’m trying to get us back on track for the rest of the year.

  6. Sam, I strongly recommend calling for lower rates AND surfing balances – but, only if these things are coupled with a true debt reduction plan!

  7. I’m so glad to hear you say that. We are always writing about debt consolidation and how to get rid of debt, and I’ve talked to so many experts who say when you are going to move your debts onto one credit card, you must cut up that credit card and not use it. Only think of it as something that must be paid off, because moving it does not get rid of it. People look at it the wrong way then get in major trouble. They need a paradigm shift!

  8. You are so right. As my gigantic student loan demonstrates, moving debt just enables the same habits. I’ve finally learned I just need to dig in and shovel out of my debt.

  9. Excellent post.

    I’ve done all of these except #1 and #3. I moved debt around for several years each time thinking I was actually accomplishing something. I convinced myself I was being productive and even proactive with my finances. It’s a very strange state of mind to be in but eventually I got my act together. Because, at the end of the day the debt is still there!

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