What’s the Vig?
As much as possible, we like to see our clients eschew debt. Apart from paying vigorish-like interest, there’s the principle that some other person or entity has first dibs on your earnings. (Don’t know the word vigorish? It refers to usurious interest rates. Watch any 1940’s gangster movie and listen for it: one gangster asks another: What’s the vig?)
Think of it. If you owe Mastercard a minimum payment, and Christmas is rolling around, are you going to buy presents, or pay Mastercard? The latter, probably, keeping your credit score in mind. If you don’t, they’ll hike up your interest rate to some legal limit, and you’ll never get out of debt.
I Closed My Bloomingdale’s Account
Even if your credit score is excellent, your rate can still go up. About 2 years ago I got a notice from Bloomingdale’s that they were taking my rate up to 34.99% on unpaid balances. There’s the vig! And I ran no balance and have an excellent credit score. I closed the account, and went to see my representative in Tallahassee about Florida usury laws, i.e. how can this be legal? And AFAIK nothing happened.
There are the horrors of being in debt: it is a trap that impinges upon one’s future ability to save and meet financial goals while causing much stress.
What is Good Debt?
What could possibly be good debt, then? Debt that buys an asset.
- Student loans buy an asset – an intangible asset, i.e. your ability to earn a good living. Education debt that prepares one for a well-paying career is good debt – any of the professions or building trades. But education debt taken on because you couldn’t figure out what to do with yourself and go back to school for another degree is bad debt.
- Home mortgages buy an asset. On a typical 30-year mortgage you’ll have paid for your home twice over. On a 15-year mortgage you’ll have paid for the house about 1.5 times, maybe a little less. Clearly that’s the way to go, though the payment is substantially higher than that of the 30-year loan. And now we have 40-year mortgages.
How could this be good debt? Because, given inflation, the home may have increased in value to roughly what you’ve paid for it over the years. Realtors look at this as an investment; regular people look at this as paying for a place to live. Once you have that home equity, there are all kinds of options for it – a reverse mortgage for income in later years, for example.
What’s Bad Debt?
- Let’s go out to dinner. We’ll charge it and figure it out next month when the bill comes.
- You finish your shopping on December 24. The bills come due in January. You pay them off over the next several months, but with interest, you’ve jack up the ultimate price you paid for your gifts.
How about unexpected car repairs? You’ve got to get to work, right? So if the car isn’t running and you’re short on cash you charge it.
This brings me to the next related topic:
Your Emergency Fund
Life’s emergencies are not a matter of if they’ll happen – they will – just a matter of timing. And I can promise you – emergencies will always happen at the worst possible time. We always have our clients save into an emergency fund of some 3-6 months of expenses. When the emergency happens – car repairs or a job loss – you are equipped to handle it without going into debt and without disturbing your retirement savings. Both of these are key.
How Do I Get Out of Debt?
Make a plan. Do some deep budgeting. Budget for your needs first and then some of your wants. If a lifestyle change is indicated – go ahead and do it. Bitter medicine is best taken on one gulp.
Look around the garage and closets. Anything you can sell? Put the proceeds right onto the debt. Perhaps a second job for a year or two? The point is: deal with it. Deal with it finally and never go back there again!
Credit Card Rewards and Points
This is my personal practice – I charge just about everything for the American Airlines miles and the Marriott and Hilton hotel points. But – when the bill comes, I pay it in full. Any type of rewards card will carry a pretty stiff interest rate. Use this strategy only when you’re sure you can pay in full each month.
Related Links
To learn more, please read these related posts: Is It a Need? Or a Want? Live Below Your means, Your Knew All Year the Holidays Were Coming, and Your Emergency Fund.
