I’m no financial guru, but I’m a self-proclaimed expert on getting into debt. I amassed about $30,000 in useless consumer debt (which was wiped out in Chapter 7 bankruptcy) by the time I was 23 years old. At age 26, I was back in debt to the tune of $60,000 between credit card debt, student loans, and a car loan. It’s pretty obvious that bankruptcy didn’t teach me much, but now at 29 I’m finally figuring out how to change my lifestyle and spending habits.
One of the things I’ve realized about debt is that no one accumulates it randomly. There are three distinct types of debt, each taken on with different motivations and justifications. As such, a cookie cutter approach to debt payoff may not be the most effective way to get over your debt once and for all.
Let’s talk about the three types of debt, where they come from, and how to tell them where to go.
Type One: Impulse Debt
What it is: Impulse debt usually manifests itself via credit card balances and bank overdraft fees. These are purchases that, for whatever reason, you couldn’t afford at the time (yet you made them anyway). Typical triggers for impulse debt are material items – clothing, gadgets, shoes, etc. – but can also include expenses for dining out, travel, or anything that can be labeled “once in a lifetime.”
Where it comes from: This type of debt stems from a lack of impulse control. Many of us have never really gone without things we need, and we convince ourselves that the things we want are just as important as our basic needs. Others may not have had their early needs met and try to compensate by giving themselves permission to indulge.
Tagline: “I deserve this!” or “This is a really good deal!”
Payoff strategy: The best way to counteract impulse debt is to demonstrate control. Give the credit cards to someone you trust. Set up a timeline to pay off your debt (consider a service like Ready For Zero) and schedule automatic payments. Every step you take to become organized is a crucial blow to impulse debt – the more power you command, the less your debt is able to take away from you.
Type Two: Crisis Debt
What it is: We’ve all been there. Something urgent happens, like an illness, broken appliance, or job loss. We aren’t prepared for it financially, but we can’t ignore or postpone the situation. Crisis debts can show themselves through credit cards, payday loans, accounts in collections, loans from friends or family, or even withdrawals from retirement accounts.
Where it comes from: No one can predict every disaster, and some of us tend to run into them more than others. But most of the time, crisis debt could be avoided if we were better savers. I know from experience that saving money can be hard – as a single parent, I usually need every dime I make and then some! Despite the difficulty, it’s important to find some kind of system so you aren’t caught off guard when emergency situations arise.
Tagline: ”Holy shit! I don’t know how to pay for this but I have to deal with it NOW!”
Payoff strategy: The first way to deal with crisis debt is remaining calm. If you act too quickly, you could overlook a better or cheaper way to deal with the situation. Second, look for ways to minimize the impact on your wallet – if it’s a medical emergency, ask about payment plans upfront. If your refrigerator dies, look through Craigslist or classified ads before you spend thousands on a brand new one. Third, make regular payments like you would for any other debt. Finally, look for ways to start saving money for the next crisis, even if you’re only saving $20 a month.
Type Three: Premeditated Debt
What it is: Premeditated debt is any debt you choose to take on after careful thought, deliberation, and planning. Examples include mortgages, car loans, and student loans.
Where it comes from: People tend to take on premeditated debt as a step toward a particular life goal. You’ll often hear these purchases referred to as “good debt,” but don’t be fooled – it’s still debt, it still has to be repaid, and it still hurts when you write the check or schedule the online payment each month. Sometimes we take on premeditated debt only to realize that we were aspiring toward someone else’s goals instead of our own.
Tagline: ”This debt is okay because it will help me ____!”
Payoff strategy: The thing about premeditated debt is that it doesn’t tend to go away easily. It also (usually) has lower interest rates than the other types of debt, but that often means higher payments. Make sure you understand all the terms when you take on this kind of debt, and don’t overlook opportunities to refinance in the future – if it will truly save you money. Once your other debts are paid off, attack with every spare dollar you can find.
What Types of Debt Do You Have?
I have a combination of crisis debt (medical bills) and premeditated debt (car payment and student loans). I’m focusing on the medical bills first while continuing to make my regular car payments – the student loans are deferred right now. At the same time, I’m working on continuing to save money, thanks to tools like PNC Virtual Wallet and ImpulseSave.
I’ve gained a LOT of control over my impulse spending, but I can’t wait for the day when I feel prepared for any emergency that comes my way (financially at least). Once I get to that point, I can throw money at my premeditated debt without worrying that I’m neglecting anything else.
What about you? What types of debt do you have, and what are you doing to get rid of them? Is there anything you need to improve upon?