You cannot borrow your way out of debt

Shovels in the SandSome people try to eliminate debt by borrowing more, and they do this all the time. They cannot get a handle on their spending and live below their means in order to pay off debt, so they try to pay off their debt by getting a lower interest rate.

Putting Lipstick on a Pig

You cannot borrow your way out of debt. Borrowing is debt. You can’t consolidate your debt to get out of debt, and you can’t refinance your home and take equity out of it to get out of debt. In all those situations the only thing you are doing is taking debt from here and moving your debt over there. In some cases, you are conveniently hiding your debt, as in the case of refinancing and taking equity out of your house. In one scenario, you are moving your debt to another place and freeing up credit so you can take out more debt in the future. You might not think this at the time, but after a while of not changing your behavior you will be tapping into that credit you freed up. No matter the situation you cannot borrow your way out of debt! You stay broke, which is a bad situation to be in, but you are getting yourself into a bankruptable situation because you keep taking on more debt. When you take equity out of your home, you are using your home as collateral. You most likely took unsecured credit card debt and turned it into secure debt!

Borrowing Makes It Worse

How long have you been trying to get out of debt this way? How’s that been working for you? Some people think they’re so brilliant because they can move debt over here or over there and get a lower interest rate, but the reality is they’re hiding their debt and they can’t figure out how to get out of debt. Most don’t want to do the necessary work to get out of debt, so they’re trying to take an easy way out which is no way out at all. You become like a dog chasing its tail or a hamster getting nowhere in its wheel.

Consider this situation: One couple making $100,000 a year buys an affordable house on a 15-year mortgage. After a few years of living above their means, they have $25,000 in credit card debt. They decide to consolidate their debt to have “one low, easy payment”. They never fixed their real issue of living above their means, so they get another credit card and start running that one up. They have $35,000 in debt a year later. The housing market has been on fire, so they refinance their mortgage because they “have equity in their house”. They refinance to a 30-year loan and use that money to update the kitchen and roll their $35,000 of unsecured debt into their mortgage. They now owe more than they originally did when they bought the house. They can “afford” the monthly payment because they stretched their mortgage out to 30 years. They made no progress of paying off their house because they couldn’t control their spending. They moved debt around and stayed broke. They make $100,000 a year and cannot get out of debt or pay their mortgage off. After making a half of a million dollars over the last five years they have nothing to show for it: no equity in their house and nothing in the bank. They thought they were brilliant by moving their debt around “to pay it off faster”.

You Can Get Out of Debt

If you have a hole in your yard, you don’t fill it up by digging another hole in your yard. You fill it up by getting some new dirt hauled in and dumping it in the hole. The same way with debt. In order to get out of debt you don’t take on new debt to pay off old debt. All you end up with is new debt or different debt. You need to take your income or find additional income and dump it on your debt. Your debt is not going away until you apply your income to it. You have to stop digging, and you have to fill in the hole. That’s how you get out.

You do not get out of debt by borrowing. You get out of debt by getting on a written monthly budget and living below your means so you can pay off debt.

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