Why Don't People Pay Off Their Debt?

[buildmybudget]

So I helped another user build a budget this past weekend and a few things to point out:

- she was really stressing out because she thought she was spending more than she was earning, almost to the point of panicking
- she has four credit cards, one of which isa zero percent furniture card for 12 more months
- she had enough money in her checking account(s) to pay off the three cards that were charging her interest
- she lives with her boyfriend, who is happy to take care of her

So we sat down and built her budget and looked at her 12-month outlook to find that she is actually in pretty good shape for someone who is working almost full time and going to school. In fact, there was more than a 10% gap between her income and expenses so she had additional room to pay off debt and start an EF.

I explained that given her living situation it is a perfect time to pay off the three cards and to stop paying unnecessary interest each month. She has the cash to do it, the support group if anything goes wrong, and even 4 credit cards if there is an absolute emergency she must get herself out of.

After a few hours, she decided to pay off one card, but not the other two interest bearing debts. It always surprises me how some people feel like they are more secure by having money in their checking account that doesn't actually belong to them(she owes the credit cards) and that they are actually willing to pay money(interest) to keep this money in their account when they could just pay the debt off and be done with it. She is more comfortable paying interest each month so she can have an inflated checking account, rather than paying off all of her debt, tightening her belt, and living within her means.

It's actually quite incredible. Has anyone else encountered this--where you explain 49 different reasons that paying off the debt is the right thing to do and the person still does the opposite?

[maat55]

I'm amazed at how many people ignor their finances and get comfortable with debt, even when people tell them there is a better solution.

Many people think they are not living or are being judged if they are not living an certain lifestyle.

Like any fad you go through, you need to bit with the bug that makes you fanatical about it. There must not be very many savings and debtfree bugs out there.

[Radiance]

secure by having money in their checking account that doesn't actually belong to them(she owes the credit cards)

THis was me! (before I found savingadvise dot com)


I series of ill beliefs, ignorance and lack of awareness:

I thought my credit lines were money in the bank. I totally failed to see that money as not -mine! "I need something, have 200 in available credit, therefore I have $200". I didn't! What I had was a potential debt for $200 plus fees...
Second, I thought that paying credit card debt was as normal, expected and reasonable as having a water bill.
Third, I had no awareness of how much credit costs, you end up paying 2-3 times the cost of the purchase depending on how fast or slow you pay.
Fourth, I had no idea is was against christian principle to hold debt, as a Christian I should have known and I should have follow, besides it just makes sense.

If she is concerned about not having money on the bank, tell her to pay off everything and build her emergency fund, she will be 'secured' because by paying off she will have available credit for 'emergencies' while she builds the ef.
Most importantly, she needs to get in the habit of having the money first and THEN buy. A big shift

[Goldy1]

I know a guy who pays minimon on his cc's. He will have 10g in the bank,make more than enought o pay his bills, and will pay minimum on a card with a 5K balance. It's like, at least pay some over minimum. It seems like he dislikes cutting a large check to anyone and letting go of the money. My thoughts are don't buy the stuff in the first place, but then I am rational.

[Radiance]

More ill beliefs:

• Instant gratification; cash now not later
• Not understanding that cash is only good when you are free.

I am not justifying that guy you refer to, but I was that guy, well, girl. So I understand, believe it or not it requires a paradigm shift.

In my case that came after a lot of adversity icncluding separation and becoming a single mom overnight.

I had no option but to take charge of my finances on my own and to take responsibility, full responsibility. If you look at my first posts, I was having trouble making a decision to cut cable!!

Believe me it is not out of stupidity, it is just a load of crapy logics and mental traps, and fear.

[wedge421]

Yah im in the same boat as your friend as well. Ive got plenty of money in my checking to pay off all of my CC's, but I just cant do it. I know I have to and I am paying one off in October. I cant pay one off in Sept because we are getting a mortgage and I dont want that to be an issue when the see the withdrawal.

[Alex_Adviser]

I'd be rather opposite to that of the title of the discussion. In my opinion a person should concentrate more on paying out their debts first rather than to concentrate more on savings.

[Justice44]

RE: Why Don't People Pay Off Their Debt

......After a few hours, she decided to pay off one card, but not the other two interest bearing debts. It always surprises me how some people feel like they are more secure by having money in their checking account that doesn't actually belong to them(she owes the credit cards) and that they are actually willing to pay money(interest) to keep this money in their account when they could just pay the debt off and be done with it.

I agree with you. From my understanding, debt is only good for those who are clearly incurring debt in order to build up their credit rating. If someone has a different view, please share it. I am relatively new in studying personal finance.

[Justice44]

Goldy You Are Right

I know a guy who pays minimon on his cc's. He will have 10g in the bank,make more than enought o pay his bills, and will pay minimum on a card with a 5K balance. It's like, at least pay some over minimum. It seems like he dislikes cutting a large check to anyone and letting go of the money. My thoughts are don't buy the stuff in the first place, but then I am rational.

The vast majority of people have no business tolerating debt. You are right. This guy should pay more than the minimum.

[Justice44]

Why Don't People Pay Off Their Debt

I'm amazed at how many people ignor their finances and get comfortable with debt, even when people tell them there is a better solution.

Many people think they are not living or are being judged if they are not living an certain lifestyle.

Like any fad you go through, you need to bit with the bug that makes you fanatical about it. There must not be very many savings and debtfree bugs out there.

I agree. The bottom line is that they need to make more money and save 8 months of living expenses. If they want more they have to make more money. Trying to pretend that you can afford a certain lifestyle will only drown you in debt.

[Broken Arrow]

Yeah, it just goes to show how much of personal finance (and investing) is behavioral. It's very important to be able to set our feelings aside and be able to see the numbers for what they are. Most of the time, spenders have to come to grips that they may not be able to afford something. For others, it may be coming to grips that their insecurities may be detrimental to their financial progress.

I have a friend who was in a car accident. He won a large settlement, but because the experience has jarred him so much, he ended up banking the entire settlement, even though his bank is paying him next to nothing. No retirement, no future investments or planning in mind, and perhaps most importantly, no preparations regarding what his other friends and family may attempt to do to get their hands on some of that money. I tried my best to get to go to a financial planner, but he wouldn't budge.

[Scanner]

I agree with all of you here but I think the reasoning isn't always as unsound as you think.

There is such a concept as called leverage.

If I owe 10K to my business line of credit but I have 11K sitting in an account, on superficial examination, it seems to make sense to pay it all off and have 1K, right? And it may. . .but. . .now I pay it all off and all of the sudden collections drops off (or a paycheck in this analogy) and now I need to tap the line again, only this time, the interest rate is higher or I don't have the line becasue the bank wants that money lended out, not just a line sittign there "just in case."

Beleive me, I am not justifying this behavior at all. . .I just think you are leaving out the "leverage" factor that comes with having cash on hand vs. being "debt-free."

It really is a funny psychology, being debt-free. I am going through a divorce right now and part of the reason (maybe 75%) is over money. I have always used debt as a tool and never abused it. And through my use of investing and debt, I would say I am 60% responsible for building our investmetns to where they are at today.

In other words, in the relationship, I was the "saver" and the "borrower". She was the spender.

My soon-to-be-ex is a lot like people here today - "Debt-adverse to the max." I mean, she has flipped out literally when I have tapped my line of credit $2500 for a business expense. I mean, she would go totally Dave Ramsey, LOL.

I would explain these concepts to her - leverage, needing capital, etc. . .but what it came down to (and everything is elemental when you think about it) is she hated to owe anybody anything, whether that's a person, a bank, etc. whereas my philosophy was I didn't mind oweing people something. . .I owe my soon-to-ex for where I am at today, Bank of America for giving my business it's start, my friends for good advice, etc. It's really okay as long as you don't owe too much where it drowns you.

Again, I hope I didn't hijack the thread but I see a lot of judgment that used to be thrust on me for my business debt (normally around 10-25K). I never carried consumer debt.

I would say as long as the person is educated to the expense of carrying debt and can pay it off and doens't want to, for not wanting to lose leverage, you shouldn't be so judgmental.

[Radiance]

I agree with scanner, there must be a balance, building an emergency fund and reducing debt should be parallel objectives.
For me it all started to figure out a way to stop 'needing' to charge each month.
If you have 11 in the bank and owe 10, I think I would pay off 5000.
The problem is with people who could pay the cc debt without ending up with zerocase and still don't
I have about 9000 in debt and I have a plan to pay it off and stay out of it.
I have $300 in emergency fund and have a plan to increase it to 3-6 and then 12 months of bare bone expenses.
Those two objectives are not mutually exclusive.

[Scanner]

Yeah, that's the rub. . .believe me. . .I am/was no saint. At one point in my business, my debt got up to 25K. $600/month was going on on a minimum loan payment.

I concluded that I was "overleveraged" at that point (like many Americans today) and had to reduce my debt. . .I got it down to about 10K. . .where it sat for a couple of years because I feel was leveraged just right. Later on, that LOC was such a point of contention in our marriage, in order to appease my soon to be ex, I reduced it to 1K. At this point, I feel "underleveraged" if there is such a concept, lol.

In the end, reducing it to 1K didn't make a lick of difference because like I said, it wasn't really about money, it was a difference in philosophy.

I don't mean to villify my stb-x either. I said she was the spender and it was true. The year I tapped my LOC $2500, we got a swimming pool (above ground), new living room furniture, and hardwood floors. When she flipped out on the LOC though, I pointed out the spending and that stuck in her craw because that was a "home expense", for the family, and what I did was for "the business" and therefore, didn't see benefit.

Anyway, she is a spender, but at the same time, very budget conscious. Very budget conscious. She would fit in here very well in many ways.

I am not really budget conscious, but investing and debt oriented. NOt a spender at all when you are going to look at my new lifestyle (a small double-wide trailer near the beach) I intend to adopt.

2 very different people but I would no way cast her as a bad person. I think she needs to re-marry someone like DisneySteve here. She would be very happy with men like that - didn't like risk in being self-employed and oweing people stuff. I am opposite and see my community ties and independence as security.

Man. . .sorry again if I am hijacking. . .again, the judgment is more making me talk than anything.

[inneedofhelp]

I think that how people deal with money is about how they were raised and taught about money.

I have heard many things about how people do or do not manage their debt....some of them I find unbelieveable...others, eh, what can you do?

I think I am very money concious, but I worked at a job for a while in which I was in the red for many months, and my budget didn't allow any wiggle room. So, I have budgeting issues to work on, and yet, most of my friends come to me for financial advice and they trust my opinion on things.

it may help that i dont give in to most impulse buys, except for food. ah, why does food cost so much!