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Thursday, January 10, 2008

Me vs Dave Ramsey: Using Debt to Pay Debt

I have heard Dave Ramsey say, "You can't borrow your way out of debt."

He is absolutely right, if you are constantly moving money around you can get burnt bad. However, I believe that debt consolidation can be OK ...sometimes.

When we were originally putting together our debts we were looking at 12 different credit lines (credit cards loans etc.) some of which had Interest Rates over 25%! As we were putting everything in order we received an offer from CitiBank for another signature loan (no home equity!) for $19,000 @ 10.49% interest.

After deep thoughts and mixed feelings, we decided to do it and we paid off our first four snowball items, our property taxes and got 100% caught up with any late bills. Since the payment was lower than the combined payments would have been, we had a larger snowball to start out with.

Where Dave is coming from is where I am usually on credit cards, cut it out of your life, you don't get a drunk to stop drinking by giving them a shot to cure their chest cold! However you WILL pay down your debts faster when you are paying a lower interest rate, it is simple math, when you apply more to the principle, you pay it off quicker!

All that being said, I have seen plenty of people in this vicious circle of debt: rack up bills, get a home equity loan and pay them off, swear it won't happen again, credit cards raise your limits since you are sooo responsible to pay it off, you rack them up again, but now even higher!

For our debt, we will still investigate credit offers to lower our rate on our remaining snowball debt, however even if we get a savings we will keep the total snowball number in order to pay them off faster, and to us that is really the point...


CatherineL said...

This is a good point - consolidating your debts is smart - if you're not going to incur anymore. I know people who have taken out huge loans then ran their credit card bills right up again - and that is definitely something you'd want to avoid doing.

Am wondering if there is a way you can change the comment section so it doesn't come up in a pop up please. It's a real pain as I have to switch browsers. Thanks.

RacerX said...


I can see why he says it. Most would then run out and recharge. I had done that before as well.

This time we cut everything up and applied 100% to debt.
No "celebrations" of our new debt like we used to do when we got a new credit card.

And I have changed the comment section. Hope that helps.

Thanks so much for being a loyal reader and commentor!

Kansas Simplicity said...

I like the idea and effort to consolidate the debt into a lower rate. It is easy to fall back post consolidation and from what I can understand of the Ramsey method, he treats debt much like an addict treatment to avoid doing a 'hit again' as it will only be one time. Yet with your determination, intestinal fortitude and discipline it, consolidation accelerates your journey to freedom. Way to Go!

RacerX said...

Much appreciated. And I agree that you should only use 100% of a consolidation, to consolidate! It shouldn't be a reason to recharge. But I see no reason to over pay, perhaps even for years do to this.

Thanks for the encouragement and for reading!

All the best

wealthy_1 said...

Sounds to me like you're ready and that if you do consolidate, you will stay on track.

I don't think we should totally rule out consolidation, if it means a lower interest rate or zero percent interest rate. Less money going to interest means more money going to principle! But we've got to be ready.

RacerX said...

Well I am a big believer on breaking the circle of debt, but it just seems silly to overpay.

I just have to have the disipline to not recharge. Another reason why for me, I cut up the cards.

Thanks for reading!

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