When we first get into debt most of us have the best of intentions. The debt we’re taking on is only temporary, right? Once this credit card, car or house is paid off I’ll never borrow money again! That sounds good – but do we really mean it?
Remember: debt is deceptive. It buys us what we want now and the payments are so easy that we get “settled in.” We no longer think about paying the loans off, just how we’ll manage the payments. At this point debt becomes permanent. It doesn’t matter that credit cards are revolving arrangements or that car loans will be paid off in a few short years. You’ll always have debt of one kind or another – so you stop fighting against it.
Permanent debt in the making
When you reach the point where you’re comfortable with debt – and most people do – your debt becomes permanent. The lenders and the loans may change from time to time, but you’ll always have the debt.
Here are three reasons you’re in perpetual debt:
New car every 5 years. One of the biggest causes of permanent debt is buying a new car every five years or less. By doing this you always have a car payment. Sure, it’s nice to have a new car – less repairs and maintenance, latest safety features and all – but it’s a pattern that keeps you forever in debt. Maybe you always pay off the debt on each car, but as soon as it’s paid off you take out another loan to buy the next car. (Learn how to stop financing vehicles.)
Perpetual mortgage refinancing. This one can be a tough call for a lot of people. If you’ve been refinancing every few years to take advantage of what seem to be ever lower interest rates, it really can seem like the right thing to do. But along the way, it’s typical to take some cash out (increasing the loan balance) or recasting the mortgage back to its original term. If each time you refinance, you recast a 25 or 27 year term back to 30, you’ll never pay off your mortgage. Many people do this and in the process create a perpetual mortgage for themselves. (Maybe you should rent instead and save for a house.)
Once a Visa, always a Visa. Credit cards take the top prize as the most stealthy of all debt – their marketing departments are full of geniuses. You start out borrowing a small amount – fully intending to pay it off next month – but the another “emergency” expense hits and the revolving feature takes over. Each month you’re borrowing a little bit more that makes the balance so large that paying it off becomes more of a wish than reality. You begin to resign yourself to the fact that you’ll always have credit card debt. (Learn how to pay off credit card debt.)
Debt is NOT your friend
Ask anyone who’s been through a foreclosure or bankruptcy – or who has been hounded by collection agents about one or more debts – and they will tell you this:
“Debt is only ‘friendly’ when you can afford to pay it. When you can’t, it becomes one of your worst enemies.”
The best way to avoid this outcome is by not being so friendly with your debt, especially when you can’t afford to pay it. We should never get comfortable with a debt, any debt, including a mortgage.
Debt increases your cost of living, cuts into your savings, and compromises retirement planning and funding. That doesn’t sound very friendly at all.
All debt should be temporary
In fact, the worst aspect of debt is the potential to get comfortable with it. Once you do, your debts have won control of your financial life. The way to change this is by viewing your debt as temporary – which is what debt is supposed to be.
If you have an installment loan, like an auto loan, and it runs for five years, plan on paying it off in no more than five years. And when the loan is paid, don’t take that as a cue to buy a new car! Instead, keep making those payments but stash them in a savings fund and use em to purchase your next vehicle with cash.
Credit cards? The basic advice stands here; plan to pay the balance in full each month. Credit cards should never be treated as an extension of your paycheck, or as a way to pay for what you really can’t afford.
And as far mortgages, 30 years is long enough! It’s okay to refinance and take advantage of lower interest rates, just be sure you never extend the term of the loan – ever. In other words, if you have 25 years remaining on your 30 year loan, the refinanced term should be no more than 25 years. So if you bought your house in 2005, you’ll still pay the mortgage off by 2035.
The best way to deal with a debt problem is by never getting into it in the first place. Borrow only if you have to, and when you do, make sure that you pay your loans off in the term provided – or less.
Grayson @ Debt Roundup says
This is a great article Kevin. Most people have good intentions when the get into debt, but then get complacent. This leads to just running the minimum and continuing to spend.
Kevin Mercadante says
Hi Grayson–What you’ve described (quite nicely!) is using credit as an extension of the paycheck, and that’s just about the worst use of debt. It leads to constantly rising loan balances, and that’s a ticket to disaster.
Kylie Ofiu says
Great tips. I know so many people who get into debt so easily and they think because everyone else is doing it, it’s ok. I even know a few people who view their credit cards or personal loans as sources of income because as they pay bits off they can redraw.
I hate debt and am so glad I have none.
Kevin Mercadante says
Hi Kylie–Yes, millions of people are living at least partially on credit. I think it often starts during unemployment, but carries on. But then there are others…