Debt Severely Limits Your Options

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Debt Eraser!A couple months ago on the Personal Finance Hour, I had a nice debate with Baker of about whether one should go with credit cards or with a cash-only system. In that episode, I mentioned that I was fan of credit cards because of their rewards and that I have never carried a balance on any card. If I had, my tune about credit card rewards might be a little different. Paying 20% in interest really makes 1% cashback look a little foolish. 🙂

A point that I never got to make, in part because it was a little off-topic, was that I never had consumer debt because I thought that debt limited your options. Making money is hard enough as it is, you don’t need to be giving up some of it to pay a credit card company for something you bought years ago. Scraping up enough for a down payment on your first home was and is still very difficult. I didn’t need the added pressure of consumer debt following me everywhere I went.

I felt that having the debt hang over me was worse than not buying something I couldn’t pay for that month.

Whenever you have debt, be it $5 you borrowed from your co-worker for lunch yesterday or $5,000 you owe a credit card company, your future is partially determined by someone else. Whether it’s a personal commitment, like $5 to a friend, or a written contractual commitment, as is the case with any sum to a credit card company, you lose control. You’ve acquiesced a small part of your freedom to someone else.

I think that “fear of the unknown” really kept me in line. I don’t know what I’ll be doing in five or ten years, I don’t know what my financial situation will look like, but I do know that having credit card debt will limit my options so I steered clear.

(Photo: alancleaver)

{ 40 comments, please add your thoughts now! }

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40 Responses to “Debt Severely Limits Your Options”

  1. Shirley says:

    I think my parents’ fear of debts must have been ingrained in us very early. It has certainly kept me out of a lot of trouble.

    #1 rule: Separate the wants from the needs.

  2. aua868s says:

    when i first started using my credit card, my simple rule was never buy anything with the card which cannot be repaid in full by the end of the billing cycle…that had kept me debt-free for the past 5, by God’s grace, my bank balance is good enough to cover most of my needs without being nervous if I will be in debt.

  3. Steven says:

    I spent the past week at a training session for an instrument my company bought, and I was the only person attending originally from the US. We were talking about the credit crisis and I was wondering if credit was so easy to obtain in Europe, and it’s not. Buying something they couldn’t pay for, or even a plan of how to pay for it, was something they just didn’t do, and they said they didn’t understand how Americans are so irresponsible.

    A friend of mine just moved out of their parents house at the age of 26, because “it was time”. They had no plans, no real career, and went out to buy a house. No clue where the down payment came from, but most likely it was their parents. Furnished the entire house with leather furniture, modern appliances, insane multimedia center, and all of it on a credit card. I’m asking them, what was the point of all this and they told me that isn’t it what everyone does/have? I look at them, and see the 10 foot pit they just dug them self into and was speechless.

    Is it a sense of entitlement? Or is it just lack of willpower for self-control? Whatever happened to earning things through hard work?

    • Chris says:

      Too many people move out on their own at such an early age. While this teaches lessons that might not be readily available to learn while living at home with their parents it the cost of these lessons can be quite detrimental.

      • Steven says:

        BTW, this same friend refused to take student loans, because they didn’t want to have to take loans to go through college.

        Instead, they carried a $1k+ balance every month for 4 years on a ~25% APR credit card, and working 40+ hours a week.

        I took the subsidized loans at 2% (freshman) and 6%-8% APR (sophomore – senior), and didn’t have to start to pay interest on those loans until 6 months after I graduated.

        Now I understand people are reluctant to take loans at time, but if you end up putting it on a credit card in the end, is it really such a bad idea?

        • Jim says:

          A loan is a loan and all things being equal, the lower interest one is better than the higher interest one. 🙂

          It’s better to not carry a balance on your credit card and not have student loans, but if that’s not possible, student loans are better if you can get a good interest rate. That kind of falls under the “duh” category for most people, but sometimes in the thick of things we behave irrationally… especially when we have so many other things competing for our time and energy.

          • Chris says:

            One good thing about having the shool expenses tied up on credit cards is that if they ever had to go through bankrupt this would be waived while the student loans would not be.

          • Jim says:

            That is some dangerous logic there…

    • saladdin says:

      But the 25% APR on the credit card could lead to that BK.


  4. Fred says:

    Jim – There’s a biblical proverb about this… ‘the borrower is a slave to the lender’…

    I think this concept could be extended to mortgage debt, too… The sooner you get rid of a mortgage, the more options you have in terms of life (e.g., if you don’t pay a monthly mortgage, you are flexible to move quickly to a new area because you are not immediately concerned about selling a house).

    • Jim says:

      Any debt makes you a slave to the lender, whether it’s perceived “good debt” or “bad debt.” A mortgage is only good in the sense that it enables you to live in a place that you couldn’t otherwise buy outright. It still makes you a slave to the lender because you are forced to work to pay off that debt.

  5. RJ Weiss says:

    Fred – Agreed on the mortgage debt. This is one reason why I bought a house when I was 24 and plan to pay it off by the time I’m 30 – I want options. Not now, but in the future.

    • Steven says:

      I’m the opposite. I won’t trade away the flexibility at the beginning of my career. As a young engineer, flexibility is my greatest asset. That includes a willingness to travel, move to wherever I am needed, and ability to think and learn quickly.

      If a company takes interest in me, and gives me an offer, the question that arises is “Do I want to move?” instead of “Can I sell my property?”. At this point in my career, I cannot support two residences, so not being able to sell the current one makes a new offer moot.

      I am able to go to the company that offers me the most, not necessarily money, but experience, knowledge, and opportunity.

      When I am further in my career and am established where my resume can pull some weight, I’ll start to look to settle down where I can balance work and life. I would like to advance my career before I get tied down with a serious relationship and maybe purchasing a home. At that time, my life will not be my own, and my wants aren’t the only ones to be satisfied.

      Like I said in the beginning, I’m the opposite of you. I want options now. Granted, I’m hoping I have options in the future as well.

    • Shirley says:

      Very smart! We did that and are both retired now with the whole world open to us.

    • Michael says:

      Dumb move financially. Keep the mortgage till you die, write off the interest, invest the $500,000 you would put towards a house in the market, or a second house. Psychologically I understand the want to be “free” of debt. But you are never really free. Leverage your mortgage a little, just be sure that you can make the monthly payment for at least a year or two with cash on the side and you can weather almost any storm. I have a similar temptation to pay off my $75,000 in student loans that is at 1.625% because I would like to be “out of debt.” But is $75,000 in my bank account more security or zero in my account with no debt.

  6. ziglet19 says:

    I also feel that debt limits your options. Lucky for me, my parents raised me that way, so I have been able to stay completely out of debt since I moved out on my own, with my mortgage being the exception. I use my credit card for almost everything, to get the rewards, but pay it off every month. If I don’t have the money in my checking account to buy something, even though I am paying with a credit card, I don’t get it.

  7. lostAnnfound says:

    My parents didn’t teach us about finances, nor did they discuss family finances in general in front of us. Of course, they didn’t have charge cards. Now we have learned the hard way about debt and boy does it limit our options! Thank goodness for sites like Bargaineering and GRS to help us!!

  8. @Steven – I originally moved to the U.S. from Europe, so being able to keep in touch gives me a lot of insight, and I just want to second your comment.

    The whole idea of credit is very new to many people outside the U.S. When my parents and grandparents wanted a new toaster, a car, or even a house, they worked their butts off, saved every penny they could, and paid their way as best they could.

    Obviously, that was “then” and this is “now,” I realize that. Most people don’t want to wait 35 years to get enough cash to buy a home. But if you think that’s drastic…what about the month-to-month expenses on a house you can’t afford?

    Anyways, just wanted to agree with you and share a little of my story.

  9. I wrote a detail comment, but it was lost and said to be too spammy?

    In Summary: Don’t allow yourself to purchase anything on a credit card unless the card was paid in full the prior month.

  10. Ken says:

    I have credit card debt but I despise it. It has lingered in my financial picture for years. I think if you don’t have the cash to pay if off that month, don’t buy it. I wish I had that knowledge 10 years ago. I know firsthand how it limits your options.

    • mppaul2 says:

      I second Ken’s statement….just hate having debt and will be most happy to be done with it. I too wish I had ten years to take back my financial mistakes and look forwared to 10 years in the future saying, I am glad I wised up when I did 🙂

  11. daenyll says:

    I hate being indebted to anyone, and the looming student loans really bug me, but until I have a steady income stream from my degree I’m holding onto the extras to emergency funds rather than throwing them directly back at the debt which is mostly still in grace for the moment.

  12. JFW says:

    I agree partly. I will qualify this by saying I am a commercial banker. Those who do not have intended purpose for leveraging assets should not do so. However, student loans are a good example of leveraging assets (in that case, future earnings) to achieve what you could not with current assets. If you leverage your balance sheet to service a new segement of your industry, that can be responsible. If you need proof, take a look at the tangible debt to net worth ratios of any company in the S&P 500. I guess the take away is, don’t borrow against future earnings if the borrowing doesn’t improve future earnings (i.e. don’t pay for today’s TV in tomorrow’s dollars:)

  13. JFW says:

    Second comment:

    I was some of the “european” mind set posts. I was able to have lunch with a well known economist in the Maryland DC area several months back. He gave me a nice nugget that makes sense from my perspective.

    It is not only rational, but advisable to leverage your assets if you are improving future earnings. This mind set applies mostly to corporations and governments, but it can also apply to personal finance. In personal finance, you will improve return on equity while limiting risk if you can use others’ resources to help you increase your own. If you think of that in the context of future earnings, you would be well advised to “responsibly” leverage your assets (i.e. house, investment property, marketable securities etc…) until retirement when future earnings become largely fixed.

    Just a thought from a credit minded person.

  14. SE says:

    Remember Donald Trump’s philosophies of “be persistent with your passions”. He favors leverage, good deal making, and having lots of debt.

    • saladdin says:

      2 different things. Business leverage and personal debt are not the same thing.


      • Jim says:

        The path to wealth isn’t paved with interest payments to credit card companies. To take that quote and twist in such a way really takes the original meaning and throws it out the window.

  15. aua868s says:

    Jim…just read your article which you had published a while ago regarding “good debt”….waiting for those days to come back when we can actually be happy to have that kind of debt..

  16. eric says:

    Good motivational point. I just abhor the thought of carrying a balance.

  17. PJ says:

    forward this article to the White House!

  18. Jessica says:

    We are all for not paying interest! We even extend this principle to buying cars. We are currently shopping for a new (to us) family car and I just don’t think the dealers know what to do when someone says they’re not going to finance a car. Apparently just writing a check for a $25K car isn’t all that common. They don’t know how to play the trade-in value vs. what they say the price of their car is vs. the interest they’ll earn on the life of the loan game. It’s like the simpler the math, the harder it is for them to calculate (or fool us into thinking they’re not trying to screw us)… but entertaining.

  19. I think alot of the issue goes over most peoples heads because culturally we’ve gotten too comfortable with debt in general. It starts with “good debt”, mortgages and student loans, then works back from there.

    We can justify carrying any debt if we can justify the purchase attached to it.

    There’s a good debate on DebtFreeAdventure on saving for retirement vs. paying off debt. There are a lot of good opinions on the topic, but I lean toward staying out of debt.

  20. T. says:

    When I was in my 20s, I made the mistake of trying to get people to like me by spending money I didn’t have. It took 2 years of working a 2nd job to clear that debt, and I didn’t have a credit card for the next 10 years. I don’t really recommend either extreme.

    Not having a credit card made things harder, and as we move toward a cashless society, it will get harder to operate without a credit (or at least a debit) card.

    Now we operate on the “use the cc to get the brownie points” system and pay it off every month. By living within our means, we’ve managed to save enough that an unexpected car repair or expense may eat into savings, but won’t require us to carry a balance on the credit card.

    We went without to put $20 a week into a savings account to help our kids pay for college. A friend of ours with almost no retirement fund took out a 2nd mortgage on her house to help her kid out. All I could do was shake my head. I can’t even imagine taking on that kind of debt, only to become a burden later.

    I find it interesting to watch my kids and their friends. They all got cars at 17, because suburbia isn’t setup for non-car people. They get new cellphones on a regular basis. Every renter I’ve ever had owned a large screen TV, long before we bought ours (on sale and the floor model – woo-hoo!).

    We buy good used cars, and lots of good stuff can be found on eBay. Furnished an apartment through thrift stores, and you’d never know it. Use every coupon & promo code I can get my hands on. Sure, it’s silly sometimes, but I enjoy the “thrill of the hunt”, and when we retire, it’ll be debt-free, with enough to not worry and do the things we want to do.

  21. Dan Cuprill says:

    A credit is an excellent tool. But like all tools, it can be misused. I use a Marriott Rewards Visa for just about every purchase I make. And like you, I pay the balance off monthly. I haven’t had to pay for a hotel room in several years. And I travel often. For the disciplined consumer, credit cards make sense.

  22. Izalot says:

    I agree with Jim…cash is king but credit card rewards is just awesome! Discipline is the key.

  23. GasMan says:

    Revolving credit card debt is dangerous and foolish. I was once a fool and paid enormous amounts of money in the form of interest rates. However, with discipline, I was able to pay off my high interest debt. Now, I take advantage of the rewards card and earned over $1,000 in 2009 towards an IRA. My take, if you are disciplined, credit cards can be a source of income. If you are not disciplined, credit cards will devour your income and future earnings.

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