Tuesday, November 2, 2010

The Debt Paradox

Yesterday morning I got a phone call from one of my credit card companies.  They were complaining that I only made a partial payment last month; they added a warning that, if I didn't get caught up, the Special Payment Plan I am currently on may be cancelled.

Of course, the reason I made partial payments last month is this:  we had just gone through two moves, and that strained our already-tight budget.  Thus, we did the best we could in paying our bills.

During the course of the first move, my wife's credit card lost her Special Payment Plan, because of disruptions in budget and payment.

So, here's the paradox:  we get on these plans because we couldn't afford the typical monthly payment.  We couldn't keep up with these payments, because we would rather make sure we had things like food, shelter, and transportation...and so our plans are revoked.

All this, because we used credit to buy things (in our case, the Biggie was health insurance) in the first place!

Am I the only one who finds this paradoxical?

Of course, the way to cancel out this paradox is to pay off our debt, build up a nice emergency cushion of money and food, and then never get in debt again.  (With probably only one exception:  medical bills, if they can't be avoided, because of danger to life and limb.  But then, I can live with medical debt, if I have to.)

1 comment:

  1. "never get in debt again"


    I've pretty much decided that "credit" (i.e., debt) is generally a bad idea, and is really only justified in 3 situations:

    1) Home loans. The price of even a small home is so high that it's nearly the only way to afford one unless your income runs into 6 digits, but the payments can actually be less than you would pay for an equivalent apartment/rental.

    2) Cars. Again, the price is so high (compared to the effective lifetime of most modern cars) that only the "rich" would be able to afford one without it. OTOH, the current trend of getting a new car on another loan as soon as the original is paid off is the wrong way to do it too. Run it as long as possible without worrying about losing trade-in "value", and use the money that would go towards payments to build up a car fund for when you can't run it any longer.

    3) Emergencies. Medical expenses, an unfortunate series of unpredictable events that drains your emergency savings, things like that. Not the "This [thing X] is still good for a while, but [thing Y] is better and I want it but don't have the money right now" that people so often use credit for.

    Even (or especially) in these situations, it should be paid off as soon as possible.

    As for your situation, remember, the credit card companies love those kinds of paradoxes. If they can get you off of that payment plan and hit you with more and more fees, they can keep you under their thumb and paying them longer, without having to actually loan you any money - they get a prolonged income with effectively no additional expense.

    Of course, it's the building up of that cushion that's the hard part - especially when you're fighting the credit companies. I'm in a similar situation where my income is exceedingly close to my expenses and I haven't been able to set aside much at all, and it sucks.