managing debt http://www.wisebread.com/taxonomy/term/11698/all en-US Find Extra Cash by Rotating Your Credit Cards http://www.wisebread.com/find-extra-cash-by-rotating-your-credit-cards <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/find-extra-cash-by-rotating-your-credit-cards" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/000061309940.jpg" alt="" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>I once took an accounting course taught by the owner of a retail toy store. It was a challenging course, but I have to say, it did impart some pearls of financial wisdom that I still remember and try to apply when managing my own finances. One was, &quot;A dollar in your pocket today is worth more than a dollar a year from now.&quot; This was his favorite &mdash; and for good reason. A toy store lives or dies based on how effectively its cash flow is managed because over 50% of annual sales often occur during a two-month holiday shopping season. So it has to survive the other 10 months of the year on a cash flow diet.</p> <p>The idea seems obvious. After all, a dollar in hand today could be deposited into a savings account or invested. The main point, though, is that having the dollar now gives you greater control.</p> <h2>Maximizing Cash Flow</h2> <p>The concept applies to receiving payments from others (accounts receivable, in accounting speak) as soon as possible <em>and </em>also to postponing payments to others (accounts payable) as long as possible. Basically, you're trying to hang onto your cash for as long as you can, and then use that cash to improve your financial situation.</p> <h2>Time Your Credit Card Billing Periods to Find More Cash</h2> <p>Here's an example of how to stretch your credit card accounts payable by at least a month and as much as a month and a half, <em>without incurring a late payment penalty</em>. This will require having and using two credit cards.</p> <p>Most credit card companies allow you to pick the end date of the billing cycle, so be sure your card company gives you that choice for each card. Now simply pick an end date of the 15th of the month for credit card #1 and the 30th of the month for card #2.</p> <h3>Card #1</h3> <p>Use card #1 only for purchases between the 16th and 30th of every month. The credit card company will close off the billing cycle for card #1 on the 15th of the following month, at which time they will issue you a bill, but give you another two weeks or so to pay it. Voila! You have 30&ndash;45 days of &quot;float,&quot; or extra time to pay.</p> <h3>Card #2</h3> <p>For card #2, pick the 30th of the month as the end date of its billing cycle. Then after the 30th and before the 15th of the next month, use only card #2. By doing so, you will stretch out the float period for <em>all </em>of your credit card purchases to at least one month, and as much as a month and a half.</p> <p>I admit, this can be a lot to remember, so to make it easier I just write &quot;Use 16th-30th&quot; on the back of card #1, and &quot;Use 30th-15th&quot; on card #2.</p> <p>It should go without saying that you benefit from this system only if you pay your card balances in full when they are due &mdash; otherwise interest will set you back much more than anything gained.</p> <h2>Here's What You Gain</h2> <p>Alright, so you now have 30&ndash;45 days of float at your disposal. That's enough time to receive an extra paycheck or two. How will you put this freed up cash flow to good use? You could keep the money in your checking account. But would that help you get ahead? Unlikely.</p> <p>Alternatively, you could use it in a way that provides some return. That's probably what a good toy store owner would do. For example, it might allow you to make an extra principal-only payment on a loan, such as a car loan or your mortgage. Or maybe make an additional <a href="http://www.wisebread.com/7-penalty-free-ways-to-withdraw-money-from-your-retirement-account">retirement account</a> contribution (a good example of the &quot;pay yourself first&quot; principle).</p> <p>Granted, this is a one-time cash flow bonus, and the benefit might seem small. Don't be fooled. Eliminating even a single monthly mortgage payment or trimming your balance on a car loan is <em>meaningful </em>progress toward your financial goals. But what&rsquo;s really important is that this system reinforces a mindset &mdash; a mindset in which you&rsquo;re always thinking of ways to stretch out or delay expenditures to free up cash. That cash can be put to use in positive ways that get you ahead. Over time, with each success you will gain a little more control. That's what it's all about &mdash; taking greater control of your finances, until you reach financial independence. Then you'll have complete control.</p> <p><em>What tips do you have to stretch out your cash? How do you use that freed-up cash?</em></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/keith-whelan">Keith Whelan</a> of <a href="http://www.wisebread.com/find-extra-cash-by-rotating-your-credit-cards">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/top-6-reasons-why-using-cash-only-rocks">Top 6 Reasons Why Using Cash-Only Rocks</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/10-reasons-why-i-prefer-credit-cards-over-cash">10 Reasons Why I Prefer Credit Cards Over Cash</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/6-reasons-why-cash-is-still-king">6 Reasons Why Cash Is Still King</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/10-credit-card-truths-you-wish-you-could-tell-your-younger-self">10 Credit Card Truths You Wish You Could Tell Your Younger Self</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/dealing-with-debt-credit-counselors">Dealing With Debt: Credit Counselors</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Credit Cards cash cash flow managing debt paying bills rotating payments strategy Fri, 25 Mar 2016 09:30:23 +0000 Keith Whelan 1678305 at http://www.wisebread.com Life After Bankruptcy: What's Next? http://www.wisebread.com/life-after-bankruptcy-whats-next <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/life-after-bankruptcy-whats-next" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/bankruptcy-wb.jpg" alt="life after bankruptcy" title="Life After Bankruptcy" class="imagecache imagecache-250w" width="250" height="188" /></a> </div> </div> </div> <p>Having to file for bankruptcy is something we all hope we never have to do in our lifetimes. Whether you file for Chapter 13 or Chapter 7, there are repercussions to going through this process. However, like with other setbacks in life, you can recover. There may be different paths to recovery for each form of bankruptcy, but there is always hope!</p> <p>You may have done everything you can to avoid bankruptcy but those sweet 0% interest credit cards may have gotten the better of you. Or your health or unemployment issues may have taken center stage in recent years, and you were left with no recourse but to declare bankruptcy. When considering your financial future following such an event, you can expect that trying to secure credit for the next 3 to 5 years is going to be tough. Also, you can expect this negative mark to appear on your credit report for the official length of time of 10 years; although sometimes you may get lucky and the time can be reduced to 7-8 years. For those who need to weigh their options further, check out <a href="http://www.wisebread.com/how-you-know-when-it-s-time-for-bankruptcy">How You Know When It's Time For Bankruptcy</a>.</p> <h3>Bankruptcy And Your Credit History</h3> <p>It&rsquo;s legal for creditors to keep financial events on your report for 10 years, but that&rsquo;s not a hard and fast rule. So how does bankruptcy actually affect your credit? It does so by lowering your credit score by 200 +/- points &mdash; usually because of late payments on accounts and not just because you filed for bankruptcy. If you find yourself becoming overwhelmed by payments, then this is an ominous sign. This is one symptom that can eventually lead to serious financial consequences for you if you fail to make any changes about your situation.</p> <p>Now the good news: if during the bankruptcy proceedings, you decide to reaffirm or keep some of your debt and you continue to take responsibility for these loans (e.g. your car loans or house mortgage), then you may have a shot here (to some degree) to preserve your credit score and future credit worth in the eyes of lenders.</p> <p>Additionally, there will be credit card companies (yes, they are out there) that will solicit you after the bankruptcy. You'll be debt free after all, right? You should certainly be cautious and wary, although you may think of this as a second opportunity to do things the right way. While taking on new credit and applying for a secured credit card can be a way to rebuild your credit history, you'll have to evaluate just how responsible you can be with handling debt all over again. You'll need to tread down this road very carefully because if caution is not heeded, your actions could lead you back down the same path towards bankruptcy. Here's more on how to build good credit (and clean up your bad history).</p> <h3>Bankruptcy And Your Living Situation</h3> <p>For those who have gone through bankruptcy, you may wonder just how your living situation may become affected. If you're a prospective tenant, you may be surprised to know that in many cases, landlords who own individual homes will be open to considering your application: after all, you've got no debt after you've filed for bankruptcy, and you're eager to build up your finances. Your living expenses and rent are surely a high priority for you. On the other hand, you may find it more difficult to deal with some large apartment complexes and management companies that frown upon those with a record. At any rate, you're likely to still find housing, and things may not be as bad as you thought it would be.</p> <p>Now if you&rsquo;re a homeowner, reaffirming your mortgage is the sole way to keep your home. Let&rsquo;s consider the advantages of this move. The most obvious benefit is that you get to keep your home! This helps your credit and puts a roof over your head while keeping your bank or lender happy. But if you do decide to include your mortgage in the bankruptcy, you&rsquo;ll be handing your home back to the bank and walking away. If you aren&rsquo;t a homeowner yet, keep in mind that you can get approved for an FHA (HUD insured government loan) mortgage after two years from the date you are discharged from bankruptcy.</p> <h3>Bankruptcy And Your Financial Future</h3> <p>Do keep in mind that you'll need to continue making payments if you have other credit lines, and that you'll need to keep an eagle eye on your credit score. What most people may not realize is that this is precisely what credit monitoring services are intended for. You can best keep track of your FICO credit score by using myFICO products, which offer visibility to the most widely used score that lenders use.</p> <p>It may take 3 years before you can qualify for a conventional loan once more, and when you do, the credit score requirements will no doubt be pretty stringent. or such loans, you'll typically need a credit score of at least 620 or higher, while you'll need a score of at least 680 to snag the best mortgage rates. For the lowest unsecured personal loan interest rates, you'll need your score to be in this general vicinity. Approval for these various loan scenarios will be up to the underwriter&rsquo;s discretion. If you&rsquo;re considering a mortgage after bankruptcy, I would consider talking with a financial advisor or mortgage banker about specific bank guidelines and your specific scenario so you can get a better understanding of your situation.</p> <p>Given everything that we've discussed, anyone facing bankruptcy can hopefully see that there's light at the end of the tunnel. Recovery from bankruptcy can happen, and will happen if you're diligent, committed, and positive.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/silicon-valley-blogger">Silicon Valley Blogger</a> of <a href="http://www.wisebread.com/life-after-bankruptcy-whats-next">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-2"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/8-reasons-youre-bad-at-money-and-how-to-fix-it-asap">8 Reasons You&#039;re Bad at Money — And How to Fix It ASAP</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/debt/bankruptcy">How to File For Bankruptcy</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/youve-defaulted-on-your-loan-now-what">You&#039;ve Defaulted on Your Loan. Now What?</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/15-surprising-ways-bad-credit-can-hurt-you">15 Surprising Ways Bad Credit Can Hurt You</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-improve-your-credit-score">How to Improve Your Credit Score</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Personal Finance bankruptcy building credit filing bankruptcy managing debt Tue, 23 Feb 2010 14:00:39 +0000 Silicon Valley Blogger 5396 at http://www.wisebread.com Dealing With Debt: Credit Counselors http://www.wisebread.com/dealing-with-debt-credit-counselors <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/dealing-with-debt-credit-counselors" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/Credit Counseling.JPG" alt="" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <h3>If you're in debt trouble, get help.</h3> <p>I just published my third book about living debt-free. It's called <a href="http://moneytalksnews.com/store">Life or Debt 2010</a>. To go with it, I'm doing TV news stories and writing blog entries that I hope will help you find extra money in your budget to pay off debt.</p> <p>But this story is for people who can't think about embarking on a debt-destroying mission yet because their debt is currently destroying them. If you've got creditors calling, are behind on your payments, and basically just not making it, you need to find help, and the sooner the better. But what kind? There are three heavily-advertised options these days: credit counseling, debt settlement, and bankruptcy. (In fact, notice the Google ads all around this article right now!)</p> <p>Over the next few days we'll take a closer look at each, starting with credit counseling.</p> <p>Have a look at the 90-second news story below, then I'll go into more detail on the other side.</p> <p><embed height="300" width="480" allowfullscreen="true" allowscriptaccess="always" type="application/x-shockwave-flash" src="http://blip.tv/play/kjqBvql9Ag%2Em4v"></embed></p> <h3>Credit Counseling</h3> <p>One of the first news stories I ever did 20 years ago was about credit counseling. Over the years I've done plenty more and have gotten involved with them in other ways as well: I'm on the advisory board of one local counseling agency, I've produced video and sold books to others, and several sponsor <a href="http://moneytalksnews.com">my news stories</a> in various cities nationwide. Suffice to say this is a business I know quite well.</p> <p>And they're a great way to get help with debts. There's no shortage of them out there, and many will help you for free. But look before you leap.</p> <p>Open your yellow pages or look online for &quot;credit and debt counseling&quot; and you'll see lots of companies that seem to be falling all over themselves to bring you back from the brink of debt destruction. They're all over the TV and radio these days. Many wave the nonprofit banner like a flag and promise to reduce your interest rates, or even get the amount you owe cut in half. Some claim their services are free, or nearly free. So how do these things work?</p> <p>Credit counselors typically help by putting you on a Debt Management Program, also known as a DMP. When you participate in a DMP, the agency is essentially getting between you and the people you owe, most often <a href="http://www.wisebread.com/credit-card-guide" title="Ultimate Credit Card Guide">credit card</a> companies. They contact your creditors and attempt to negotiate lower interest rates, get penalty fees waived and arrive at a monthly payment you can actually afford. Once your plan is approved, you send one check to the counseling agency every month and they divide the money among your creditors. It's not a quick fix &mdash; a typical DMP lasts three to five years.</p> <p>Most counseling agencies give free advice, but if you end up in a DMP, you'll typically pay a small monthly fee to get it set up (0-$50) and monthly fees (5-10% of your debt payment, but normally capped at $25-$50).</p> <p><strong>But here's something important to know</strong>: the monthly fees these agencies collect aren't what keeps them alive. They're also getting paid by the banks whose accounts they're collecting. In years past the percentage they got was 10 to 12 percent of the debt. In recent years, that percentage has declined considerably, and some major banks have started handing out grants instead. Still, it's banks that supply the primary support for this industry, and historically that's largely been through debt management programs.</p> <p>Why do you care? Well, since credit counselors make a large part of their income from putting you on a DMP, they obviously have a powerful incentive to do so. It could be a problem, since sometimes that might not be in your best interests. Other options, like repaying your debt without a DMP, or declaring <a title="Wise Bread's Guide to Bankruptcy" href="http://www.wisebread.com/debt/bankruptcy">bankruptcy</a> might be better in some instances, but credit counselors don't get paid by recommending either.</p> <p>That doesn't mean you shouldn't approach these folks. There are plenty of agencies that dispense honest, objective advice, including advice that ultimately doesn't pay them. But if you're not careful, you could get hooked up with a &quot;DMP mill.&quot; These are companies that typically do a lot of advertising and put virtually everybody on a debt management program simply to make money. If your problem includes bills that don't qualify for a DMP (like a mortgage or car loan, for example) they won't help you with them. They also won't offer any type of budget counseling. And if your situation is so tenuous that bankruptcy should be a consideration? You'll never hear that suggestion from them.</p> <p>For the DMP mill, it only takes a few minutes to sign you up for a program, and if you ultimately have to file bankruptcy anyway, who cares? You'll have wasted your time and tons of money, but they'll have collected their money for as long as you were able to stick with the program. And like most other credit counselors, they too are non-profit, lulling many into a false sense of security.</p> <p>The way a credit counseling agency should work is that they should counsel you regarding all your debts and present you with all your options before you do anything that you can't undo. In other words, they should counsel you, not slam you into the only fix that makes money for them.</p> <p>A quality credit counseling organization will also help with simple, free advice and other non-debt, credit-related issues. Here's an interesting story I did where a <a href="http://www.moneytalksnews.com/2009/01/12/money-in-09-finding-help/">credit counselor helped untangle a credit card billing mess</a>.</p> <h3>Specific Recommendations</h3> <p>I'd look for a credit counseling agency that belongs to one of two trade associations: the National Foundation of Credit Counselors (NFCC), or the Association of Independent Credit Counseling Agencies (AICCCA). I personally know many members of both of these organizations and in my experience, they're normally credible and well-intentioned. You can find NFCC members near you at their <a href="http://www.nfcc.org/FirstStep/firststep_01.cfm">Find a Counselor Now</a> page. You can find AICCCA members near you by using their <a href="http://aiccca.org/find.cfm">state by state lists</a>.</p> <p>Full disclosure: as I mentioned above, my company has done work for members of both of these organizations. But rest assured, my recommendation is never for sale.</p> <p>Are there other quality agencies that don't belong to either of these organizations? Most definitely. Dues for NFCC and AICCCA aren't cheap, and I also personally know agencies that don't feel like paying them, yet still maintain high standards. So you shouldn't necessarily assume non-members are bad. But wherever you go, ask questions before you agree to anything. Questions like:</p> <ul> <li>What is the percentage of clients they have on debt management programs? If the answer is nearly all, that's bad. If the answer is about half, that's good, because it shows they're trying to help their clients with other methods.</li> <li>What fees will you have to pay?</li> <li>What amount of budget counseling you're going to get. If you're not going to get any tools to help change the way you deal with debt, you could end up in the same place farther down the road.</li> <li>Do their counselors have any training and certification?</li> <li>Is the agency accredited by an independent organization?</li> <li>What will their help mean to your credit history? The correct answer here is, &quot;There's no way to tell for sure. Could even be negative. But consider the alternative.&quot; The wrong answer is, &quot;No problem, buddy! Sign here!&quot;</li> </ul> <p>Check the <a href="http://www.bbb.org/">BBB</a> or other online sources for complaints. And talk to more than one agency. When you talk to several, it's easy to distinguish between the ones that come across like used-car salesmen vs. ones that sound like what you're really looking for: an objective counselor.</p> <p>Bottom line? If you can't see your way out of a debt disaster, definitely get help. And don't be ashamed or embarrassed to do so. More than a million people every year file personal bankruptcy. Millions more do nothing to try to help themselves and end up with ruined credit and lots of sleepless nights. Going to a pro for help may not be your proudest moment, but there are definitely a lot worse things that could happen.</p> <p>Next time we'll be covering another heavily-advertised debt solution: debt settlement.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/stacy-johnson">Stacy Johnson</a> of <a href="http://www.wisebread.com/dealing-with-debt-credit-counselors">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/what-can-you-do-with-13-extra-a-week-0">What can you do with $13 extra a week?</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/credit-counseling-when-you-need-it-and-when-you-dont">Credit Counseling: When you Need it and When you Don&#039;t</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/dealing-with-nasty-debt-collectors">Dealing with Nasty Debt Collectors</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/solving-a-debt-dilemma-with-debt-settlement">Solving a Debt Dilemma with Debt Settlement</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/why-you-can-t-stick-with-a-budget">Why You Can&#039;t Stick with a Budget</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Budgeting Consumer Affairs Credit Cards Debt Management credit counseling debt Debt Help managing debt Thu, 21 Jan 2010 15:00:02 +0000 Stacy Johnson 4709 at http://www.wisebread.com How Debt Fools People http://www.wisebread.com/how-debt-fools-people <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/how-debt-fools-people" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/black buck.jpg" alt="black buck by Pranav Yaddanapudi" title="black buck by Pranav Yaddanapudi" class="imagecache imagecache-250w" width="250" height="209" /></a> </div> </div> </div> <p>People who have a natural aversion to debt often wonder how some people get themselves into such terrible problems with debt. Don't they know how much it costs? Don't they understand they can't just go on boosting their standard of living through ever-increasing levels of debt? But that's not really how it happens. As a public service, here's a worked example of how debt spirals get started.</p> <p>Suppose: Two neighbors are debt-free. Both want a new TV that will cost $500. Money is a little tight &mdash; each one only has about $50 a month available in the budget.</p> <p>One saves for a TV. He puts $49.76 into a high-yield savings account paying 1.3% interest. After 10 months he has $500 and buys a new TV.</p> <p>The other borrows to buy the TV. He takes out a $500 loan at 11% interest, makes payments of $52.56 and pays off the loan in 10 months.</p> <p>At the end of ten months both people have a TV. The guy who borrowed the money paid a total of $28 more than the guy who saved, but he got his TV 10 months earlier. You could look at it as if he paid $28 to rent a TV for 10 months. That's a nice boost in standard of living that someone could reasonably view as being well worth the money.</p> <p>The debt-averse people suppose that a classic debt spiral starts when you extend this logic beyond a single time-limited purchase: A couple months after buying the TV you decide to buy a recliner &mdash; after all, now that you're spending so much time in front of your TV you want a nicer chair to sit in. In this scenario the foolish borrower encumbers every available dollar in the budget with payments on more and more stuff until he or she can no longer make the monthly payments.</p> <p>I'm sure that happens to some people, but I don't think it's the most common scenario that gets people into trouble with debt.</p> <p>The reality of debt spirals is more insidious. It results from the loss of flexibility when a household incurs a perfectly reasonable amount of debt &mdash; or even no debt at all, but some amount of fixed monthly expenses &mdash; and then suffers a negative economic event such as a large unplanned expense or a drop in income.</p> <p>Because that's the way that debt really works its harm. It's not that it costs so much money (although it can), nor is it people obligating themselves beyond their means (although some do). It's that it makes the household finances so much less flexible. It's not the extra $28, it's the inability to adapt.</p> <p>To the saver, a spike in fuel costs means cutting back on saving in order to put enough gas in tank to get to work every day. To the borrower it means either not being able to get to work or borrowing money he can't pay back.</p> <p>The reason debt fools people is that even when the cost of the debt is perfectly reasonable, the lost flexibility means any little problem can kick off a debt spiral.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/how-debt-fools-people">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/when-to-use-savings-to-pay-off-debt">When to Use Savings to Pay Off Debt</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/contributing-to-a-roth-versus-paying-down-debt">Contributing to a Roth Versus Paying Down Debt</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/self-sufficiency-self-reliance-and-freedom">Self-sufficiency, self-reliance, and freedom</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/funding-your-401k-when-youre-in-debt">Funding your 401(k) when you&#039;re in debt</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/dealing-with-debt-credit-counselors">Dealing With Debt: Credit Counselors</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Personal Finance Debt Management debt debt spiral managing debt Mon, 11 Jan 2010 14:00:05 +0000 Philip Brewer 4547 at http://www.wisebread.com