5 Huge Mistakes in Debt Elimination "Strategies"
Mistake #1: Bankruptcy
A short time ago as I write this, my mother had to declare bankruptcy. She had charged too much to credit cards...and then the money ran thin.It made me sad that a mere two months after the fact, I learned about a debt elimination program that saves anyone from having to declare bankruptcy. I guess it made me sad that it was just too late to be able to help my own mother.
First off, having to declare bankruptcy is rather humiliating. You have to go to court, take a real butt chewing about being irresponsible with your credit...and it's stuff that you already know! It's just not applied in life all the time.
Then you have your name in the local paper for having declared bankruptcy...uh. Humiliating.
Besides that, you stand to lose all that's in your name. You still have to pay the attorney his exorbitant fees. Ick. Declaring bankruptcy is...
Something that is built into the money system of the US and most other countries in the world! That's right. See, it's mathematically impossible for Everyone to pay off all their debt. There just isn't enough money in existence!
See, our money is created as a debt obligation. You can read more about how it works.
But it sucks to have to declare bankruptcy because of a temporary bout of foolishness. Don't do it. Call me first before you decide to.
If you know of anyone who's considering declaring bankruptcy, tell them about this information now.
Mistake #2: Home Equity Loans
Okay, so you're not going to declare bankruptcy. Good thing!The next alternative is to take any existing equity in the home and take out a lower percentage loan to pay off the credit cards. That's even dumber than declaring bankruptcy! Why? Because you can usually save your home when declaring bankruptcy.
Consider this for a moment: Your credit cards are not secured loans. They are unsecured loans, and usually at pretty high percentage interest rates. If you then transfer your unsecured loans to a home equity loan - which is a secured loan - if anything happens and you can't make the payments, *poof* your home is gone. (And the bank never had to do a thing to get it!)
Even though you end up paying less monthly, the main problem lies in cash flow management. See, if you got into trouble with credit once, chances are over 80% - by actual statistics - you will get into trouble again. That trouble might not be for another 3 years, but the odds are overwhelmingly against you.
If you happen to be very, very firm in your decisions, and you make a clean, clear-cut decision to NEVER again get into trouble with credit, then, and only then, should you consider this option.
Mistake #3: Debt Mediation
The purpose behind debt "mediation" is for someone to talk to your credit card companies and negotiate a lower percentage interest rate.While that's great for lowering your monthly payments a little bit, it costs money. There are not-for-profit and non-profit agencies out there that will do the same thing for free.
Often times, the mediators, whether you pay for them or not, can lower your interest rates by as much as 50%. So if you were paying (or are paying) 18% on a few cards, your interest rates can be decreased into the neighborhood of 9%.
That's not bad, but a better decision would be debt consolidation where all of your payments are put into one debt obligation with an interest rate around that same 9% or even 10%.
BUT you are about to discover why debt consolidation is a mistake...
Mistake #4: Doing Nothing
Doing nothing is the path that a few daring souls choose. (Well, either daring or just plain broke.)What sucks about doing nothing - not paying, not answering your phone, not opening your mail, and not ever being granted any more credit, is that doing nothing actually "shortens your reach" when it comes to earning money. It affects your entire life.
I don't know if you believe that "what goes around comes around" like karma, but when you stop communicating - monetarily - the other side stops, too. In other words, the money coming in slows down or stops: An income slowdown, whether immediately or coming soon, occurs.
So...doing nothing is also a huge mistake.
[Incidentally, I personally found out the hard way that the above is true. Since then, I have turned around. Please don't make the same mistake I made.]
Mistake #5: Debt Consolidation
Of all these mistakes, this is the one that sounds the best. It's probably the least of the debt elimination mistakes on the page...BUT...Now the idea behind debt elimination through debt consolidation is that you get a lower interest rate and enough money to pay off all of your debts through a loan. It's a debt consolidation loan.
There won't be but the one payment - instead of all the payments for all those credit cards. And the monthly payment is lower for the one than all the credit cards together.
Now that sounds just phenomenal, doesn't it?
But alas, it's very similar to getting a home equity loan and consolidating your debts that way. While you will feel better off because of the lower monthly payments, you still haven't corrected the main problem.
That main problem is the management of your cash flow.
So here you are, you just got your consolidation loan, and you find out that you have a little extra disposable income. Life is grand. You can actually go out to eat instead of fixin' dinner at home. You can get a couple extra things when you go shopping.
It's all wonderful for a little while. Then, after a few months, you want something. You can't afford to pay cash for it, but your credit isn't bad. There's an 80% chance that you'll finance it. And add more debt. And then it will happen again. And again.
And within a couple of years or less...you're right back in the same boat you were in when you first got that consolidation loan. That's just...awful.
That's what happens to over 80% of those who get their debts consolidated. Why? Gotta Have it Now! It's a syndrome that afflicts and damages the lives of 96% of those over 18 in the U.S. Hm...
It's the inability to delay the gratification of having "it" now. It's a cash flow management issue.
And until you conquer that, it's useless to consolidate anything...except to delay the destruction of your life.
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