The ABC's of Getting Out of Debt: Turn Bad Debt into Good Debt and Bad Credit into Good Credit
By Garrett Sutton, Esq.
In the late 1980s, I went to a seminar on financial success. The instructor, a young charismatic speaker, went on and on about the perils of debt, saying repeatedly, "Debt is bad. Debt is your enemy. Get out of debt as soon as you can." Looking around the room at approximately fifty attendees, I could see most heads were nodding in agreement.
Just before the break, the young speaker asked, "Okay, are you ready to cut your ties with the bondage of debt?" Most attendees nodded. "If you are ready to break the bonds, then stand, get out your credit cards, and hold them up high so everyone in the room can see them." Most of the class stood immediately while there were several people, like me, who were looking around waiting to see if we should follow or not. Slowly, everyone stood, myself included. I figured that since I had paid money and invested this much time, I might as well go along with the process to see what I could learn. As I held my gold credit card in front of me, a smiling assistant handed me a pair of scissors. As I grasped the scissors, I knew what was to happen next. "Okay, class, cut your credit cards in half," said the instructor. As I heard the sounds of scissors cutting through plastic, there were actually several cries of shock, some groans, and even a few people crying. After cutting my card in half, I just stood in silence, mostly numb, waiting for some form of educated enlightenment to sweep over me. Nothing happened. I just felt numb. Although I had been in credit card trouble in the late 1970s, when my nylon and Velcro wallet business was caving in on me, I did eventually clean up my debt and had gone on to use my credit cards more responsibly; hence I did not have the same cathartic reaction some people in the class seemed to have when they cut their cards in half.
In less than a week, my replacement card had arrived in the mail and I was happily on my way, using my gold card again. Although I did not have a blinding cognition after cutting my credit card, the process did make me more aware of how much of a problem credit, primarily its use and abuse, can be in a person's life. Today I watch many so-called financial experts saying the same things that young instructor was saying years ago, such things as "Get out of debt." "Cut up your credit cards." "Put your credit cards in the freezer." The problem I have with much of their advice is that they tend to blame the credit card as the problem, rather than the lack of financial control and financial education of the card user. Blaming one's credit card for their financial woes is much the same as me blaming my putter for my high golf score.
Credit and debt are very important subjects in anyone's life. Today, young people while still in school are actively solicited by credit card companies, which have often caused me to ask, Why don't we teach young people about money in school? Why do we have to wait till young people are deeply in credit card debt and in debt due to school loans before we realize that there is a problem? If you ask most young people "What is the difference between credit and debt?" I doubt many could tell you the difference, and yet we let financial profiteers educate our youth.
Consumer debt has exploded in the United States and in countries around the world. In 1990, the U.S. consumer was $200 billion deep in credit card debt. In 2005, that debt will explode to $985 billion, nearly a trillion dollars of credit card debt in just the U.S. alone. That does not include the national debt-the U.S. is the largest debtor nation in the world-not the debt many financial institutions have exposure to worldwide. How much more credit can we continue to extend to allow the consumer to accrue more debt? I do not know. If we come to the day when the U.S. consumer has more debt than credit, the world's economy will probably begin to implode. When the world begins to call its loans, when people and organizations are not able to pay their bills and credit becomes tight, many more financial problems will surface than just our individual credit card balances.
So are debt and credit bad, as so many financial experts say? Absolutely not. Debt and credit are powerful financial tools that have allowed many in the world to enjoy the highest standard of living in history. Without debt and credit, we would not have such things as great cities, massive industries, airlines flying us to all parts of the world, resorts to relax at, excellent food at exciting restaurants, new cars to drive, comfortable homes to live in, and so many choices of entertainment.
So if debt and credit are not bad, then what is? In my opinion, lack of financial education and fiscal responsibility are bad. I think it tragic that my parents' generation, the World War II generation, has left massive debt for my generation; and my generation, the Vietnam era generation, has done the same to our kids. In other words, while personal credit card abuse is irresponsible, the massive bill each generation passes on to the next generation is even more irresponsible.
How the young people born after the year 2000 will pay for multiple generations of fiscal irresponsibility, I do not know. One way to keep paying for all this debt is to keep expanding credit and encouraging people to spend more and more. The June 28, 2004, issue of Time magazine ran an article about schools now sending kids on field trips to shopping malls, car dealerships, supermarkets, and fast-food outlets. Why? One reason is that our cash-strapped schools cannot afford to send kids on field trips to zoos, museums, or cultural events. Yet many businesses are ready and willing to pay for these field trips to start grooming new customers while they are still in school. In other words, as long as each of us keeps consuming and keeps using our credit to acquire more debt, the economy will grow and the bills of past generations will be paid. While this may be good for business and will help keep our credit and debt economy afloat, to me it sounds risky and fiscally irresponsible.
The good news is that even though most of us cannot control our national irresponsibility, we can take control of our own finances. One of the most important lessons my rich dad taught me was the wisdom of knowing there is good debt and bad debt. Simply put, rich dad said, "Good debt makes you rich and bad debt makes you poor." Unfortunately, most of the people who were cutting up their credit cards in the financial seminar I attended only had bad debt. Even more unfortunate was that the instructor leading the class only knew of bad debt. He had no idea that good debt existed. To him, all debt was bad. Bad financial education is the cause of poor financial management.
One of the reasons this book is so important is that it is important to be financially responsible and to use the power of your credit and debt intelligently. Before turning you loose into this book, I would like to pass on three bits of information my rich dad taught me years ago. They are:
1. Bad debt is easier to get than good debt. If any of you have ever tried to get a loan to buy a rental property or to start a business, you may know how difficult it is to get a loan for investments. Yet if you want a car loan or a new credit card, credit, debt, and money are easy to come by, even if you have horrible credit.
2. Bad debt makes it harder to get good debt. If you have too much bad debt, and you want to begin using the power of debt and credit more intelligently, like for starting a business or investing in rental property, bad debt makes it harder for you to get the good debt and hence to become richer. One big reason this book is so important is that getting rid of your bad debt is an important step toward you becoming richer and more financially free.
3. Debtors can get rich faster than savers. Many people think that saving is better than borrowing. In fact, I know that many people work hard to save money and get out of debt. In reality, it is those who save and get out of debt who fall behind those that borrow and get into debt.
Let me use an example to explain this last statement. In 2002, my wife, Kim, purchased a commercial building for approximately $8 million. She put $1 million down and borrowed $7 million dollars. The million-dollar down payment came from accrued gains in her other investments, so technically, the $8 million purchase was a nothing down investment. This investment alone puts approximately $30,000 a month in her pocket. While many people do not make $30,000 a year, her private company makes this in a month.
To people who are savers and debt averse, I often ask them, "How long would it take you to save $7 million?" For most people, saving $7 million is out of their reality. I then ask Kim how long it took her to borrow $7 million. Her reply is, "It took me about two weeks. Because it was such a great real estate investment, several bankers wanted to give me the money."
That is an example explaining why a debtor can get richer faster than a saver. Not only is the debtor getting richer, but the saver is getting poorer. Due to inflation and the irresponsible printing of more and more money, your dollars in savings are going down in value each year, while the debtor's property is often going up in value. A person who had $10,000 in savings in 2000 actually had only $7,000 in savings by 2003 because their U.S. dollars lost that much value. So savers lost and debtors who invested in real estate won. Of course, if the whole financial house of cards comes down, which it could, then the savers would win and the banks would get their real estate back.
The reason Garrett Sutton's book is so important is that, like it or not, debt is a powerful force in our world today. The financially intelligent are using debt to enrich themselves while the financially uneducated or irresponsible are using debt to destroy their lives. There is good debt and bad debt in this world. A very important lesson in one's life is to know how to minimize bad debt and responsibly use good debt to one's advantage. This is especially true in today's financially changing world.
Years ago, after cutting up my credit card, I realized how important my rich dad's lessons on debt and credit have been to me. That day, in the seminar, I realized that many of the participants should have cut up their credit cards. But cutting up your credit cards will not necessarily make you richer. A credit card is a very powerful tool, and that is why I love my credit card because I would rather have its power than be without its power. For a more enriched life, one must learn to respect the power of debt and credit, and learn how to use that power.