Any regular reader to this blog knows that I discourage carrying debt, particularly loans for depreciating assets such as cars. Most of all I discourage credit card debt. There is simply no way to make enough from investments to fight a 25% credit card interest rate. Anyone who wants to become wealthy should only use a debit card, and even then using cash should be prefered (since you’ll spend less).
From the Wall Street Journal (Thursday, March 17th) comes another good reason to avoid debt. It seems that some debtors, particularly credit card companies, debt collection agencies, and auto loan companies are actually putting debtors in jail! See the full article at the Journal’s online edition:
In some cases the debtors don’t even know that there has been a warrant sworn out on them until the sheriff’s deputy shows up at the door. Ironically, the article mentions one individual who was put in jail for two days by a unit of AIG due to a debt of $4024.88 on an auto loan. (Remember AIG, the company that shared a large share of the responsibility for imploding the financial markets a couple of years ago with their collateralized debt obligation writing business, accepted a multi-billion dollar loan from the US Government (which is not expected to be repaid anywhere close to in full), and then had executives go for an elaborate spa treatment a few days later? Think maybe the government will put a few of their executives in jail when they don’t pay their loans?) Apparently the debtor in that case was treated to a strip search and delousing. He says he didn’t even know he was being sued and therefore didn’t show up to the trial (resulting in the arrest warrant).
The take-away from this is that by taking on debt you are setting yourself up to be at the mercy of various entities, many of whom care little about whether you can keep your lights on or stay in your home if you pay their bill. You set yourself up for harassment, having your bank account cleared out, or even spending some time in jail.
Each time that you use that shiny gold (or platinum) card you are putting a set of shackles around your wrists that you can’t release until you pay off your balance. Even if you pay every month, if you mess up just one time (write a check wrong, forget to mail it on time, or are on vacation when the bill comes) you can end up paying all sorts of fees. If you are paying the minimums and lose your income due to a job loss or medical emergency, you may get to meet the other side of your credit card company. Suddenly names like “Chase” and WatchOvaYa” will then take on a whole new meaning. Now ask yourself, “Are those airline miles you’re collecting that you will probably never end up using really worth the risk?”
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.