Originally Posted on October 30th 2007
I was reading a recent news article on Yahoo! Finance (http://news.yahoo.com/s/nm/20071028/us_nm/usa_creditcards_debt_dc) about how mortgage borrowers are using credit cards to get cash so they can make their mortgage payments, and in turn delay the default on their homes.
At first glance, one may ask why people would continue to get themselves deeper and deeper into debt once they are in a foreclosure situation. The answer is simple: This is how the banks designed the modern credit system. People will borrow and borrow from wherever they can get the money regardless of the future repercussions. They way it starts is simple: The homeowner has a situation which causes a portion of their income, which is usually earmarked for the mortgage payment, to go to a surprise expense such as a medical emergency, auto repair, etc. This begins the downward spiral towards a foreclosure. Credit cards then start being used for basic necessities such as gas, groceries, and eventually cash advances to pay the mortgage payment (i.e Borrowing at 22% to pay a 6% mortgage). If the credit score of the homeowner hasnt been severely damaged, they are able to apply & receive more and more credit which they use until there is none left. Eventually, that is what always happens, and at that time the home goes into foreclosure and the borrower is left with (typically) tens of thousands or more in credit card debt as well as a severely blemished credit report.
This makes it even tougher to get back to a normal financial situation due to the high interest, penalties, and fees charged by the credit card companies. So, while I understand why homeowners would use plastic to delay default, it must be noted that they will only delay the inevitable foreclosure of the property and dig a deeper hole into debt. By setting up a cash reserve of several months before a problem hits, homeowners can avoid this problem all together. Then an emergency expense like a car repair or medical bill can be paid out of the cash reserve/savings and not alter the other expenses. Sudden financial demands WILL come up, no matter how much money you make or where you live, so it is important to be prepared before they happen! The majority of my clients save enough money that they can add more flexibility to their budget as well as put some money away each month for a “rainy day fund”.
Are you struggling each month just to pay the bills you have, so it is nearly impossible to put any money away for emergencies and other sudden expenses? Contact me today for your FREE debt melt-down analysis and let me show you how!