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Debt is Evil

We have to change our mindset or the way we perceive debt – all kinds of debt. We have to view debt as evil – like an insidious disease that is out to zap us of our financial health. Too dramatic? We only have to consider our current economic situation. A crisis in part driven by huge increases in mortgage debt. We are drowning in debt of all kinds: mortgages, credit cards and auto loans (list can go on). We have thought of debt as an instrument of convenience and quick way for us to get something we want. We often forget, while at the cashier or clicking the “Place Order” button, that we have to pay the debt back and most of the time we end of paying more than what the item is worth because of interest or finance charges.

Sadly, debt has become too ingrained in our culture. It is everywhere including in our government. The U.S. government is swimming in debt (as of October 20, 2008): $10,344,579,016,232.71 or $10.3 trillion for those of us who lose count of decimal places. That is $33,922 per U.S. citizen. If we watch T.V., or are online we get bombarded by commercials for credit card companies and mortgage companies. I get at least ten pieces of junk mail per week pushing some credit card. Who cares what is in your wallet? How many times have we heard “no money down” or better yet – “bad credit, no problem”?

U.S. household debt levels have increased tremendously over the last seven years. Between 2001 to 2007 look at the total debt for U.S. households (in billions of dollars):

The drop in 2007 is good and bad. Good in the sense that we are not borrowing as much but bad because we are probably leveraged (too much debt) up to our eyeballs – maxed out. This is bad for our economy because too much of our money is going to pay off debt and less to buying food and other products that generate jobs.

Credit cards are the leader of the evil cabal. They are like that evil voice in our subconscious or the serpent in the Garden of Eden. They are always tempting us to use them to gain instant gratification. We can buy that big screen TV or Steve Madden shoes instantly without a second thought. But then the monthly bill comes.

Credit cards are deceiving. Most credit cards are considered revolving lines of credit which means that borrower can use money (credit) up to a set limit and pay the principal balanced down and use the money again – there are no fixed number of payments and the outstanding balance can be paid over time or in full any time. It is the revolving nature of credit cards that make them deceptive.

One of the biggest mistakes that we make if we are carrying a large credit card balance is to pay only the monthly minimum payment on the credit card. This is where the credit card companies make a killing off of us. A large portion of the monthly minimum payment consists of “finance charges” basically interest on the balance and very little of the monthly minimum payment goes to paying down the balance. Consider this: $5,000 credit card balance at 18.90% and we pay just the monthly minimum payment it will take us 12 years and 10 months to payoff that balance. And this assumes we don’t purchase anything else with that credit card!!! If you do, you can forget about that 12 years and 10 months – we’re talking when humans sprout wings timeframe.

I wish we can cut them up or shred them but unfortunately our economic system elevates credit cards to some sort of right of passage. Can you rent a car without a credit card? There are people among us that are living without credit cards. We should aspire to live like that. But short of the cutting the credit cards up there are things we can do and should not do:

1. If we are carrying a monthly balance, we have to pay more than the monthly minimum payment;
2. Shop around for the lowest finance charges or Annual Percentage Rate (APR) on credit cards;
3. Do not use a credit card for groceries, dining or gas;
4. Do not max out the credit card; and
5. Do not carry a monthly balance – pay off the balance each month.

The increase in U.S. household debt listed above was driven in part by increases in mortgage debt – first mortgages, second mortgages, home equity lines of credit. We borrowed heavily against the most valuable asset we own. The problem now is that some of us got in way over our heads – some of us knowingly and some of us were fooled.

There is help available to those of us who are concerned about losing our homes to foreclosure. The best thing to do is contact our lender or mortgage loan servicer. Their number should be on the back of monthly loan statements. Call them and talk them about your situation because right now it is better economically for a mortgage lender to work with a borrower to possibly restructure a loan instead of foreclosing. Second, there are several other options available to assist homeowners with keeping their homes: 1) Homeowner’s hope hotline – 888-995-HOPE; and 2) HUD-approved housing counselors.

For first-time homebuyers, make sure to have more than 3% down payment and enough money to cover other home expenses such as utilities (gas, water, electric and phone) and unexpected repairs. For those who want to lower their monthly payment through refinancing shop around for the best rate and loan terms. Everybody should be very careful with adjustable rate mortgages (ARMs).

We have to be very careful with debt. We have to manage our debt wisely. Yes, debt management is part of an overall written plan which includes a household budget. Debt payments can easily crowd out more important expense items in our budgets such as retirement savings, college savings and even groceries. This is why debt is evil and we should work to eliminate it from our lives.

Please repeat after me: Debt is Evil.