Debt. It’s a four-letter word and certainly not ideal under any circumstances. Being debt-free is always better than being in debt. But not all debt it created equal. Generally, debt comes in two flavors: Secured and unsecured.
Secured debts are “collateralized”. That means the borrower pledges something of value to the lender that acts like a security deposit. If the borrower defaults, the lender gets ownership of that valuable asset. A home mortgage is probably the best example of reasonably safe, secured debt. In a mortgage the property becomes the collateral. The lender can take it if the borrower doesn’t perform as required.
Unsecured debts, on the other hand, are wild and crazy because there is no security. Even worse, invariably it comes with double-digit interest rates. All it takes is the borrower’s signature and the deed is done. This kind of debt is not safe, in fact it is toxic. Unsecured debt can ruin a life. Credit-card debt is the best example of toxic debt. It looks so harmless. It offers so much convenience and flexibility. And nothing could be farther from the truth. Unsecured consumer debt is like a steel trap armed with attractive bait to lure you in. Then once you’re in, it slams shut. Now you are its prisoner.
I’ve been in the debt trap. It’s a horrible place to be. It took me 13 years to gnaw my way out of a 6-figure load of unsecured, toxic debt. I didn’t file for bankruptcy. I repaid every dime including interest, penalties and fees.
I didn’t get into the debt trap against my will. I did it to myself, naively and stupidly. I nibbled at that delicious bait. I chose to ignore the warning signs that I was heading for trouble if I didn’t change my ways. I paid a terrible price for acting so foolishly.
Here are the warning signs I ignored:
- Living on credit instead of cash.I regularly used credit to pay for things because I didn’t have enough money. And I couldn’t pay the statements in full every month because as I said, I didn’t have enough money! I didn’t see my lifestyle as the problem. My problem was that I didn’t have enough money to support the lifestyle I wanted. Credit was the bridge between what I had and the lifestyle I wanted.
- Unable to pay the balance in full. While this is a huge warning sign for you, it’s “mission accomplished” for your credit-card issuer. Once you cross the line where you opt to pay the required minimum monthly payment, the company goes into full-on party mode. They did it! They got you over the line into “permdebt,” and chances are pretty good you’ll remain there until you die – always owing, never able to pay the ever-growing balance in full.
- Delaying payment or paying late. Juggling was my way of life. I’d count on next month’s income to pay this month’s bills. I was always behind and often paid late.
- Unable to give or save. This is the first sign that you’re overspending. I never had enough to save or to share with others and I didn’t see that as a problem. I didn’t have enough money to help myself, so how could I possibly plan for the future or help others?
- Unable to pay taxes. Don’t ask how I know about this. It’s a painful memory.
- Living an extravagant lifestyle. Guilty, guilty, guilty. At the darkest moment in my financial past, I was driving a new Cadillac complete with 47 more enormous lease payments. Need I say more? I cared more about what others might think of me than what I thought of myself. I cared more about The Joneses than I cared about myself, which led me to make some of the most ridiculous choices.