Get Out From Under Debt and Stay That Way

What would your life be like if you had no credit card debt? If you’re paying a mortgage, what would your life be like if you also owned your home free and clear? What do you think would change if you were truly debt free?

Sound impossible? It’s not, although if you watch the ads and listen to the news, you’ll be tempted to believe living with credit card debt and mortgages is the only way to fully participate in today’s world. What’s rarely spelled out in the ads or by our bankers in our credit card statements is exactly the financial cost of debt. In fact most people have little if any real understanding of debt in general.

There are two broad categories of personal debt; one is called secured and the other unsecured. Your home and your car are typical examples of secured debt. If you get into trouble and can’t make your payments, you’ll have to give the car or the house back to the company that loaned you the money. Much of the time, but not always, surrendering the property that secured the loan pays off the debt.

Credit card debt is unsecured debt. If you charge, for example, a new set of towels for your home, and you can’t pay the credit card company, they won’t come after you for the towels. They have other ways of working to get their money.

The fact that you never see the actual cash when you’re borrowing tends to hide the facts. In truth, you’re being loaned money by a third party so you can pay for something you don’t have the cash for right now or you’re not willing to pay the full amount right now. You agree to make payments, including interest, until the debt is paid. Because we don’t see the cash in these transactions it’s easy to ignore the size of the obligation we’re taking on.

Interest is a sort of rent you pay on the balance of what you owe. It’s expressed as a percentage of the balance. That interest often adds up over time to considerably more than the original amount borrowed. Unless you actually figure out what the money you borrow is costing you, you’re likely to be surprised, even horrified.

Take, for example, a $200,000 mortgage payable over 30 years at a fixed 6% interest rate. According to BankRate.com your total payments will be $431,677.03 of which $231,677.03 is interest. Your interest payments total more than the original price of the property. (Search on “total interest paid” to find calculators that will give you this information.)