This past week, my mixed household’s primary financial forecasters — me for the household of Ramos-York, my friend Russ for the household of Kovacs-Mitchell — worked on our respective worksheets re: debt management and budgeting.
I am imagining some of my readers shuddering with fear, loathing, and little bit of nausea. “Dear God, why?” they ask.
Simple: we have this wild idea of actually being debt-free and staying that way.
“Fools’ dream!” they respond. Maybe, maybe — but hear me out…
Ah, debt. We live in a society that thrives on debt — financing, credit cards, credit reports, mortgages, loans of all sorts of stripes, APRs, etc. — without incurring debt, we wouldn’t grow living-standards-wise as fast as we’ve been doing. Who puts things on lay-away nowadays? Do we even know what lay-away *is*?
And we get offered more credit based upon our history of paying off past debt — how often we repay debt , how large the amount is the payment — that a person who has *never* incurred debt is hard-pressed to get any credit for anything, no matter how meticulous he or she has been in paying past bills. It’s sort of insane if you think of it that way, but it’s like this: Look at a dollar bill. It says, “THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE.” Debt goes hand-in-hand with a money-based society, especially a *paper* money-based society in which the value of the currency isn’t in its inherent worth but the *trust* that the debt will be paid with it.
So all a credit history is *is* a document tracking how good a person is in paying back past debts, which builds financial trust in the future creditor. Pretty simple, huh. But this is an important concept to know in doing Creative Debt Management.
Creative Debt Management is this: Some kinds of debt are better than others, and it’s the “good” debt that you’ll need in order to zot out of existence the “bad” debt, and the income that you have is what you use to pay back the “good” debt. In other words, you rob Peter (take out a “good” loan, like a low-APR education consolidation loan with a low APR) to pay back Paul (say, your high APR credit cards), and use a part of your available income to pay back Peter. It’s a way to pay back amazing amounts of bad debt on very little income.
The effect is this: The credit history report will show you making a *huge* payment that clears your bad debt, which raises your credit rating. It’ll also show you making small but regular payments on your good debt, which *also* raises your credit rating. As a grad student, good debt for me are my school loans, which I’ve used to pay off credit cards, pay ahead rent and utils, pay off car payments, and also pay off earlier school loans. Even though I was a part-time, adjunct instructor making a humble salary and was incurring amazing amounts of student loans towards my degree, those loans were in in-school deferment, and I was using the proceeds to zot bad debt. The effect for me were platinum-level credit card offers, American Express offers, and almost instant approval of anything that required credit checks.
It’s insane, I tell you — but it works! The key thing to remember is this — you’ll eventually need to pay back the good debt with actual income, but good debt — it’s good because it is more flexible in payment schedules and has a lower APR than bad debt — affords you the time eventually to get that job that will give you real income. And I’m not talking CEO-level or doctor-level income. I’m talking about the $30K range.
That’s where I’m at now — the “pay back Paul” portion of creative debt management. Yes, there’s a lot of financial planning in being able to pull this thing off, and one must develop the discipline not to incur more bad debt when the bad debt goes away. But the end result for doing successful debt management *is* being debt-free *with* an excellent credit history behind you.
For me, in the game of debt and credit, I wanna *win*.