Tom : I just paid off a nice chunk of my debt.
Mark : Really.
Tom : Yep, we paid off one of our credit cards!
Mark : That’s great, how did you find the money?
Tom : I used a balance transfer for a new credit card that my wife signed up for.
Mark : So you didn’t actually reduce your debt at all?
Tom : Well, I guess technically you’re right
I hear these types of conversations all the time. Let me be clear, moving debt from one account to another isn’t debt reduction. Buying a new car with a home equity line of credit still means that you have $25,000 more in debt. Paying off credit cards with another credit card or a home equity line isn’t debt reduction. The even scarier part is that you may have just done more potential harm than good.
Why…unless you change the behavior that got you into the debt in the first place there is a good chance that the empty card will fill up again and you will still have the extra balance that you transfered to your other account. Now instead of a Honda coming to repossess the car when you realize you can’t afford the payment, they will come after your house.
Switching money around usually hides the real problems. Sure, transferring money to a 0% credit can help, but only if you are focused on the real goals of debt reduction :
- Debt reduction is about undoing financial messes; it is not about exacerbating them.
- Debt Reduction is about changing your relationship with money and giving ourselves a positive financial outlook.
- Debt reduction is about changing our bad behavior and replacing them with helpful ones.