The Debt Reduction Paradox
I don’t think I am alone in making the statement that I have too much debt. You can’t open a newspaper (yes they still exist), watch a news program, or listen to the radio without being bombarded with a commercial about getting out of debt.
Granted, it’s a booming industry. Not only is the Country in debt, but a significant portion of people are in trouble. I feel that there are 3 categories of people in debt. While there is no intrinsic difference (they are still in debt) I do feel there is subtle difference between one type and another.
The first category is the “Suddenly Debt Ridden.” These people have done everything right and were just hit with an insurmountable incident. Maybe they got laid off of work. Maybe that had a catastrophic medical incident. Maybe they made a bad investment. In any event, it’s a new, scary and uncomfortable situation for them.
The second type of person is what I call the “Chronically Debt Ridden.” These are people that just do not know how to handle money. You can give them everything and in a couple years, they are broke. Think of all the professional athletes that made millions of dollars, year after year, and are now broke. They just do not understand how debt works.
The third type of person is the one I want to concentrate on. These are the “Treading Water Debt Ridden.” The ones that just trying to live life, doing everything right, have a good job and a decent paycheck, don’t live extravagantly or outside their means, but slowly and surely lose ground on debt. You make enough to keep your head above water, but small ripples (a furnace, new tires, etc..) do you in. The proverbial “death by a thousand cuts.”
So herein lies the paradox. To just get by in the world, there will be moderate expenses. For example, a new stove. You could budget $750 for it and save for one. But what if you don’t have the $750 and your stove dies. That’s OK. The appliance store will give you credit. You certainly can’t do without a stove for 6 months while you save the money, so you get the credit. At 20-27%. You have EVERY intention of paying it off ASAP. But, then you need new clothes for your kids because school is starting. Oh, and you need other necessities this month, so you just pay the minimum on the stove. If you are still reading, you know how this goes. A year down the road, you still owe $400 on your stove, and you had another moderate expense in the mean time, and on and on.
Ten years down the road you wonder why you have so many credit cards and debt and how did you get there??? Needless to say, I speak from experience. If I showed you my credit report, you would see two things.
1. I have never missed a payment. Ever.2. My credit score is low because I have “too much revolving debt”
So how do you fix this?
I went to a bank and they won’t help me. They don’t think I can’t make the payments (even though I have 30 years of proof to the contrary). Let’s see, reduce my monthly payment, at a lower interest rate, to pay it off faster, and they don’t believe I can pay it. I should continue to pay the higher interest rate, larger monthly payments for a longer time and come back in six months. Yes. Frustrating. I know many of you have been there. I’m open to making a club :)
So what are the options? Well, bankruptcy is one. A very unpalatable one, but an option. Winning the lottery? A great option, but somewhat difficult to pull off. Find a job that pays enough to dig out of the hole quickly. Or, continue the status quo until there is one too many moderate expenses that finally capsizes the boat.
What everyone needs is a rich relative. Unfortunately, those too are hard to come by. So, what about a “faux” rich relative? Let’s say I have $1,000 (I don’t) sitting in a CD making a whole 1%. What if I could lend that money to someone for a simple 6% so that they could pay off that 27% debt they are paying to the corporation. Yes, I understand the complexities of trying to make sure people didn’t scam the system, and I don’t pretend to know all the angles. I just have a gut feeling that there are good people out there that could make this “privatized loan” work (and not let it devolve into the “loansharking” territory I know it resembles).
In my mind, the term “A Kickstarter for debt reduction” is what I am seeing. You could invest in those you wanted to and really help some people in need, and make a couple dollars in the bargain. Does anyone think I have a valid idea here? Please leave me your thoughts. I think I need some healthy conversation about it.
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