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© Copyright 2004, Jim Loy
There is a comedian who said that he was approached by a panhandler asking for money, and he told the man to get lost (but with more insulting words than that). He said, "You're better off than me; you're even. I owe my house and car to American Express." A lot of people are in debt. Our country is in debt (they're a good example for the rest of us). How do you get into debt? Some of you are in debt, and you know (to some extent) how you got there. I spend money. But if I spend money, and then have no more, then I can't spend any more, right?
Spend money you don't have: Well, the first step into debt is to spend money that you don't have. You do that either voluntarily (buy a car or house), or accidentally (get sick or be defrauded), or both. Almost all of us spend some money before we actually pay. We use electricity, make long distance phone calls, take out the garbage, and then get a bill, and then we pay. Or we may not pay these bills, because we don't have the money. Then the debt increases, surprisingly rapidly.
Emergency: Medical emergencies are common financial disasters. One trip to the hospital, and you're in debt for years. There is also loss of a job, or divorce.
Borrow money: I have a want or a need, and so I might borrow money to pay for it. I may borrow because I am already in debt. But, if I was not in debt before, I am now. Borrowing is how you get more deeply into debt.
Let's say I take my TV to the pawn shop. The guy there looks it over and determines its value. We sign a contract, and he gives me a percentage of the value. This is a loan. The TV is collateral for the loan. The TV still belongs to me, but if I don't repay the loan + interest, the pawn shop will own my TV. A pawn shop is not a good place to borrow money, the rates are bad. I lose money on the deal, whether I pay off the loan or lose my TV. A pawn shop is where people go when they cannot borrow money elsewhere. But the pawn shop is relatively safe, you don't get deeply into debt there. At the worst, you just default and give up your possessions.
So let's borrow money from the bank, and get better rates, and go more deeply into debt. The bank may ask for collateral, just like the pawn shop. In this case, it may be my car or my house, so I morgage my house, and get some money from the bank. I still own the house, but I risk losing it. I can lose my house if I default on the loan. The house is probably worth more than the loan. If I default, the bank sells the house, takes the amount the I owe, pays off the real estate agent, and gives me the rest. And I lost money on the deal. If I don't default, if I pay off the loan or pay forever, I also lose money on the deal. That is the nature of borrowing. You borrow, you lose.
Credit: I was once upset that I had bad credit. My problem was "no credit history;" I had never owed money, except to my brother. Credit allows me to take out a loan with no visible collateral. The bank trusts me to pay back the loan, because I am likely to have the money to pay it back, and because I have acted responsibly in the past.
Unlimited credit: I may have a credit limit. The bank will not let me go very far into debt, just as the pawn shop will not give me very much money for my TV. However, plenty of people have unlimited credit, they can go very far into debt indeed. unlimited credit (or a credit limit which is higher than you can readily pay back) is a trap. Many people deal with it intelligently by not abusing their credit, and going into debt only briefly, until the bills come in the mail. The trap is that I can get very far into debt, because I have credit. I may get over my head in debt. This may be the result of foolishness or an unexpected expense, like a trip to the emergency room.
Credit cards: Credit cards make paying money easy. They also make going into debt easy. American Express, Visa, MasterCard, etc., do not give me credit cards; banks do. The bank gives me a credit card, and establishes my credit limit. I can then spend money and pay later. Every time I use the credit card, I am taking out a loan. The bank trusts me to pay off this loan. If I have unlimited credit, I can not only buy a car with my credit card, but I can keep buying smaller things until the debt is more than the price of a car. My debt can spiral out of control. Credit cards are a trap. You can use them wisely (most people do), but they invite disaster. If you cannot use a credit card wisely, then you shouldn't have a credit card.
Gambling: You can get rich from gambling, but more likely you will go broke. You may not only go broke, but into debt. Investing in the stock market, or in a business, is also gambling, to some extent. Investing may be a better risk, almost a sure thing (even better than money in the bank), but it is still a risk. And it can cause great debt. The old gambling advice is, "Don't risk more than you can afford to lose."
Spiraling debt: Let's say that I routinely use a credit card to buy things. If I pay my bill to the credit card company every month, then I am doing fine. If I buy something big, and pay it off in two or three months, that is still fine. But if I make no payment, or pay off only a small amount, and the debt increases every month (or almost every month), then I am already in trouble. In this case, I am being foolish. And, it is time for action, drastic action. Otherwise, it will only get worse.
Making progress: If I am nearly always behind in my payments, but I am making progress (the debt gets less), then I am probably all right. But I may actually be fooling myself. I may make progress most of the time, and still be slipping farther into debt in the long run. This would be the clue that I am a compulsive shopper who tries very hard to save money, but occasionally goes on a shopping binge.
Drastic action: The logical solution to great dept is to 1. stop spending and 2. pay off your creditors. This is easy to say; it is not easy to do.
"Stop spending" means buy less, buy cheaper. It may also involve getting a cheaper car, moving into an apartment, cutting up your credit cards. It may mean reassessing what a "necessity" is. Long distance telephone calls to Europe may not really be a necessity. Keeping up with the Joneses and appearing rich are foolish (even if they are desirable for your work) if it means being in great debt.
"Pay off your creditors" may mean negotiating easier rates (or some other deal) with them; this includes the IRS. "Drastic action" may even mean declaring bankruptcy, the last resort. And you can get help. I am trying to determine where a person can seek help.