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Credit or Debt

September 5, 2017

What’s in a name?

Those of us who remember Shakespeare’s Romeo and Juliet from our high school days immediately recognize the phrase that which we call a rose, by any other name would smell as sweet – so let’s apply that phrase to the topic at hand; “debt” or wait a minute is it “credit”?

How do you see it:

Perception is a powerful tool that is well used in the marketing industry and financial institutions are no different.  When people first come to see to me they are stressed and they want to GET RID OF DEBT – DEBT is B.A.D. BAD!  But after they have found relief whether by filing a proposal, a bankruptcy or some other form of intervention, the next time we meet they ask about getting THEIR CREDIT BACK. 

Now notice a couple of things here – first it is “their” credit, suggesting a right or entitlement, secondly they have changed the label from “DEBT” to “CREDIT” because it sounds more positive and thirdly they want it “back“.

Let’s play with words for a moment if I say “don’t leave home without it” what am I talking about?  How about “it’s everywhere you want to be“?  those were very cool marketing ploys for Am/Ex and VISA and they worked.  Imagine if credit card companies were forced to advertise cautions like tobacco companies – “if you use our DEBT card (you don’t get credit when you use it, you get debt – so call it what it is) you will, on average, pay much more than the original purchase price for every item you buy”.  Not only that, but it is also unlikely that you will ever be able to stop using it, because of the creeping commitment an increasing percentage of your income will be used to service debt each month.

Break free!

So how do we break the habit?  First of all there are many strategies including proposals and bankruptcy to reduce or eliminate debt – that’s relatively easy.  The hard part is to avoid getting back into a pickle again.  Many people are surprised at how easy it is to obtain debt after being discharged from bankruptcy.

Banks and Finance Companies WANT to lend you money!

Keep in mind that banks are in the business of lending money – they want you to borrow money, they want you indebted to them.  Banks like to collect minimum monthly payments.  Small continuous monthly payments are why our banking system works the way it does and works as well as it does, for the banks and shareholders. 

How long can you stay in debt?

If you took out a loan with promise of paying it in full after a term – let’s say a year – what are the chances you’ll show up with the money at the appointed time?  Furniture stores count on the unlikelihood you will pay up – they make huge profits from their “don’t pay a cent events” instead of paying the loan off many people end up paying the accrued interest, so that $1,000 TV is now $1,190 (at 19% interest), and then the minimum monthly payments go on for years.

How much interest will you pay?

SAVE YOUR MONEY!”  If you pay a $200,000.00 mortgage for your house, at the current interest rate of 3.2%, you will pay more than $90,000.00 in interest over the life of that mortgage – check out the RBC Mortgage Calculator

Think about the consequences of paying short term credit card or finance company loans at 17-32% and the amount of interest that you then be paying.  If you put $2,000.00 on your store (finance company) credit card then paid it off over three years you would pay about $1,136.00 in interest charges.  Play with BMO’s loan calculator  By making only minimum monthly payments it would take much longer to pay off your debt and cost you much more money.

Is there a difference?

O.K. so there are plenty of good reasons to change our thinking about Credit versus Debt – it’s all the same thing “DEBT by any other name would be as costly to pay“.  Plan your purchases, practice making do with what you have and what you can afford until you are able to save for the things you “want” and be sure to distinguish between “wants” and “needs“.