Many frum families find themselves in debt. After all, Pesach won’t wait and neither will the mortgage. While it’s easy to just swipe plastic, credit card debt accrues quickly and is very damaging to long term financial success. Here are some pointers about the importance of avoiding credit card debt and how to bail yourself out should you face a pile of consumer debt.
An ounce of prevention
The best way to deal with credit card debt is to avoid it in the first place. These cards often have interest rates that are so high (12–28%) and are so fee-laden that a small bill can quickly become a large one. Giving away miles and other freebies is how banks get people to sample their first taste of credit intoxication, which is fine if properly controlled. However, because it is so easy to swipe and overspend, people need to be vigilant to avoid the slippery slope of high-interest debt. Also, emergencies happen occasionally, and without a temporary fund to tide them over, many frum families at all income levels get trapped. What steps can the indebted take to get back on course?
Or a tedious and painful cure
Like passengers of a boat taking on water, it is necessary to first to plug the leak. Those in serious debt need to review their finances carefully to bring household expenses in line with incomes, whether by cutting expenditures or by increasing earnings. Debt is simply the result of spending above revenue, and this equation must change one way or another. Getting rid of household loans that are the results of years of overspending requires freeing up funds well beyond the family’s ongoing regular needs. This extra money will be used first to build a small emergency reserve and then to pay up the debt. Budget balancing, whether done by the couple themselves or with a savvy friend or debt counselor, is the tedious first step in preventing a financial calamity.
Pay the costliest card first…
Once some money is freed up and a small emergency account is built, it is time to start bailing. Deciding on a repayment schedule requires compiling a list of all outstanding debts, noting the lender, amount owed, interest rate, and minimum monthly payment of each. The repayment plan involves using any additional available money (after making all minimum required payments) to pay off one card at a time until it is entirely paid off. There are two schools of thought on prioritizing which card to begin with, though. Logically, the debt with the highest interest rate should be paid off first, the one with the second-highest rate second, and so on. All else being equal, the least interest accrues this way, enabling the quickest elimination of the total obligation. The problem is that without psychological boosts along the steep road, many people lose heart and slip back into their overspending ways.
Or snowball it
Some financial planners, therefore, recommend focusing (after all minimum required payments) on repaying the loan with the smallest amount owed, regardless of the interest rate. Once that loan is gone, all excess funds are sent to the second-largest debt, and so on. Dave Ramsey calls this tactic the “Debt Snowball Plan”. As smaller loans are paid off and minimum required payments disappear, a greater amount of money is freed up for attacking the remaining larger loans. The psychological benefit of the list of loans getting smaller while the funds repaid monthly “snowballs” provides the motivation required to go the distance. There is sound logic to either approach, and people need to choose the one that is more likely to work for them.
Accelerating the bailout
Paying off a lot of debt just from ongoing income is difficult. The process can be sped up by channeling bonuses, tax refunds, or monetary gifts toward the repayment effort. Also, if their credit allows it, those in debt may ironically benefit from seeking new loans and refinancing their current debt with lower (or no) interest. If they can get it, gemach loans, credit cards offering promotional rates, or even a home equity line of credit can be beneficial in cleaning a pile of high-interest loans.
Watch for the risk
There is a risk, however, that they will fall back into old habits and use the new loans for expenses besides repayment, making things much worse (risking personal relationships and their house)! If there is any chance of such a financial backslide, families should immediately reach out for outside guidance from a debt counselor, rav, or savvy friend. Un-managed debt is a form of slavery to be avoided at almost any cost.
Is debt good?
Sometimes debt is good however…. check out this article about how debt can actually help you improve your finances and wealth. Click here
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