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“SERVICING DEBT” versus “PAYING DEBT”

September 5, 2017

Do you understand the difference?

Many people think that the fact they are able to “pay” their bills each month is a good thing.  But that is just an illusion, or delusion depending how you look at it

Ask yourself this simple question “do I like being in debt?”  If you answered “yes”, you do like being in debt, then “servicing debt” is the right thing for you to do.  If you answered “no”, you do not like being in debt, then you need to work on “paying” off your debts.

Most people who have debts are “servicing” them and not actually “paying” them.  If your balances are increasing or not substantially decreasing you are “servicing debt” – if you do not carry balances from month to month then you can truly say you are “paying” your debts.

Stop deluding yourself and start paying off your obligations – if you can’t afford to pay them off or down you certainly can’t afford to continue to increase your debts.

Banks are in the business of lending money, they want you as far in debt as you can be and yet maintain the ability to “service” your debts.  They certainly don’t want people to “pay” off their debts, that would mean a loss of a very important income stream.

Each year banks set aside money for losses, they anticipate that some people will no longer be able to “service” their debts.  In fact in 2013 RBC estimated that it would set aside $1.2 billion (4% of its revenue) last year to write off bad debt.  That was of course a conservative number as the norm is about 3%