Hands down, the worst part of debt is the fact that debt is so dang confusing. There are so many things that people do not know regarding debt. This is, in my opinion, by design. Companies that make money through debt make money when people do not know what they are paying for or how much they are truly spending for that fancy coach bag or that nice John Deere tractor. Don’t think that I admonish people for buying nice things. In fact, there was a book I read a while back that stated that the real definition of being rich is being able to do what you wish to in life without worrying about money. I want this for you. The first step is to get some more knowledge because that knowledge can be the difference between financial freedom or financial servitude.

1. The first thing to define is what really is debt. All too often, people overlook what is considered debt. Debt is when you owe anything to anyone for any reason. That cellphone payment, debt. The business line of credit, debt. Sometimes I hear that people do not see themselves as having debt if they have a home equity line or have student loans because they are “good debts” NOPE, there is no such thing as good debt.

2. The next issue with debt is the amount of money spent, making people think that debt is a tool. Credit card rewards are often causing people to spend more than they would normally have because they rationalize the overspending on a perceived return on investment. 31% of people have never redeemed any of the points or rewards they had earned. Pair this with the number of people that are confused about the programs available to them; the percentage of underutilized programs outweighs their value. Are their people that systemically pay off their balances every month and use all of their rewards? Sure. I am not saying that these people are bad. In the end, I tell people that do not see eye to eye with me that they can do what they want with their lives, but I never advise my clients that credit cards are ever a way to win. All too often, people forget that a plan to pay off a card every month only works when it works. A job loss or medical emergency can throw a wrench in the best-laid plans.

3. The third problem with debt is how it changes your day-to-day life. People grow comfortable with being in debt and view this as normal. The issue is that it can keep you from following or chasing those big dreams, and you won’t even notice debt as the culprit. What job might you have done if you didn’t have that $500 a month car payment? Could you have taken a week-long vacation to your dream destination if you didn’t have that $749 you needed to pay towards credit card bills?

4. One of the worst plagues in the financial world is DEBT CONSOLIDATION. It is a plague because it treats the symptom and not the condition that led to the issues. If you consolidate your debt without fixing what led to the debt in the first place, you are probably going to end up like most out there where you reuse the cards you paid off before. The statistics do not lie on this one. Over 87% of people reuse credit lines they once consolidated. It also makes it so much harder to see progress on paying off debt when you have one huge mountain versus a few smaller piles. The only time I EVER recommend consolidating is with student loans if it allows you to get a lower rate and allows you to get a fixed rate.

5. Did you know that MIT did a study that showed that the average person is willing to spend 100% more money on a purchase when using a credit card? Most people do not realize the emotional factors at work when spending with a credit card. There is a level of separation from the amount you are spending when you do not have to lose something immediately. When you spend in cash, and you have to give away those physical dollar bills, it solicits a response in a part of your brain that registers pain. You feel the loss differently when you do not have to pay attention to the amount and when that shiny credit card returns to your wallet. In fact, most people that go out to eat or order things online and use a credit card could not even recall the exact amount spent a whopping 15 minutes later.

6. The most common reason that people argue that debt is necessary is due to FICO scores. The problem is that this is the worst myth of any in the financial world. 90% of the financial world is basing a person’s financial worthiness on a score that has 0% correlation with the best indicator of winning with money, your net worth. Let’s look at the good old FICO score for a minute. The score is based on a few things:

   • Length of time in debt

   • Types of debt

   • Payment history on debts

   • New debt accounts

   • Amounts of debt owed

   See the trend here. Logic says that if your money is tied up elsewhere, you should, in theory, be less able to pay for things. Logic says that if you are consistently borrowing, then you have a habit of buying things outside of your means.

   Let’s take this a step further, if you won the lottery and had 300 million dollars in the bank, would your credit score change? Nope. If you saved money and had a fully-funded emergency fund, would that impact your credit score? Also nope. How about if you had a 3 trillion dollar net worth but did everything in cash? You could almost guarantee that you would not have a credit score, or if you did, it would be so low that you could not buy a stick of gum on credit.

   Fixing your credit score is what people think that they need to be concerned with. Many articles go over any number of items to work on to fix your credit. The common one people hear is that they need to ensure that they keep their debt at a reasonable level. This is easier said than done when you are living paycheck to paycheck. How do I begin to see progress when adding to my debt every time something comes up? These are sentiments I hear often. Another common task given to people trying to repair their credit score is to reduce the debt to income ratio. Both of these tasks are tough when you are living without a budget. Getting on a budget also helps fix the other common area, making all your payments on time.