Using Credit to Leverage Your Debt – Does It Make Sense To You?
by Connie Brooks
For some people using credit to leverage their debt makes perfect financial sense. For others, it’s something to be avoided completely.
This argument has deep moral and emotional roots that are squarely pitted against what ought to be purely logical behavior.
To be honest, I think the one thing we can all agree on is that being in debt is not a positive thing. The only question is, how do you go about getting out of debt, and what is the best way to do it? Turns out the answer is personal!
Choosing Not To Leverage Your Debt:
Choosing not to leverage your debt usually means that you stop using your credit cards, make no attempt to balance transfer your debt, do not borrow against your home, do not consolidate your loans, or borrow extra money in any way in order to repay your debt.
In other words, you stop “playing games” with your finances and just pay down your debt as quickly as possible.
Dave Ramsey is easily the most famous proponent of this method, and many, many people have used his tactics to become debt free.
As far as my peers, the personal finance bloggers go, they are all over the board on the leverage issue – with some very notable stand-outs:
In April of 2005, I sat down at my computer. I was depressed and worried. I had two kids and a great wife, but our finances were a mess. We had less than $500 in our savings account, I was barely funding my retirement, and we were almost $12,000 in debt. Feeling frustrated, I decided that I was tired of being broke – and I determined to do something about our situation.
Since that day at my computer, my life has changed, dramatically. I managed to pay off all of my debts, build up a decent emergency fund, fully-fund several retirement accounts, purchase a newer automobile with cash, and live without using credit cards. Now, instead of living life worried about bills and paperwork, I look forward to planning for my future and managing my finances.
He’s definitely not alone in his approach to debt repayment either. In a guest post at Clever Dude’s website, The Money Hawk let loose with his own thoughts on using your credit to leverage your debt:
From the article:
Leveraging debt to build wealth is not a winning strategy.
It is for some people, but not for you. For most of us, it’s stupid. And that’s not just my opinion; the millions of people in this country who are deeply in debt, filing for bankruptcy, working through foreclosure, closing businesses, and struggling to feed their families can attest to it.
So, what’s the problem with choosing not to leverage your debt? Isn’t it faulty logic to believe that going deeper into debt (through leverage) will actually help you be debt-free?
See, there’s the rub – logically leveraging your debt makes a lot of sense. If you balance transfer your high interest credit card debt to new credit card with a lower or zero percent interest rate you save money. Sometimes a LOT of money. Saving money allows you to pay down your debt faster, and actually keeps your debt from growing while you are paying it down.
The problems I think, lies with us imperfect humans! Yes, I might be able to consolidate my loans, borrow against my home, and pay everything back at a reduced interest rate. Sounds easy – but it isn’t.
If my habits were bad, and I used credit irresponsibly enough to get into debt in the first place – what makes me think I can “change my ways” just because I took out a consolidation loan? Or what makes me think that just because I have balance transferred my debt to a new card that I won’t just charge the old card right back up too?
That’s the leverage trap. The truth is, people who understand exactly how to use their credit do make use of leverage – the right way. Those of us who have more difficulty with the whole “responsible use of credit” issue are probably a lot better off taking Dave Ramsey’s advice, even if it costs us some additional interest in the long run.
That’s my two cents – what’s yours? Where do you fall on the leverage issue? If you leave me a comment below, I’ll respond!
Thanks also go out to the follow web sites who featured our articles in their carnivals this past week:
- The Carnival of Financial Planning at The Skilled Investor’s Blog
- The Rich Life Carnival #26
- The Penny Pinching Carnival 1st Edition
- Carnival of Money Stories #91 – Manifesting Wealth in 2009 @ Greener Pastures
- The Money Hacks Carnival – New Year’s Eve Edition @ Cash Money Life
- Festival of Frugality #158 @ The Well Run Dry
January 3rd, 2009 at 22:06
Nicely said… I second your argument because not using an excellent credit history to your advantage is really throwing money down the drain.
Too bad anyone with a pulse and a pen could leverage up during the good times.
January 4th, 2009 at 00:25
Thanks for your comment Matt.
You are very right, the current economic conditions make leveraging debt much more difficult for those without a stellar credit rating.
The funny thing is, the better your credit rating, the better chance of success I would say is possible when leveraging your debt. People with high credit ratings don’t abuse their charging privileges, and my personal opinion is that it makes them less likely to fall into the “leverage trap” of re-charging their accounts.