The DIY Debt Trap: Why Smart People Stay Stuck

Welcome and Episode Introduction

Steve Rhode: Welcome back to the Get Out of Debt Guy Show. I’m your old original Get Out of Debt Guy, Steve Rhode. And with me as always is the new original, more original Get Out of Debt Guy, Damon Day. Say hello, Damon.

Damon Day: How’s everyone doing? Well, today we’re gonna talk about the dreaded “I’ll figure it out myself” trap. You know, people — I’m a grown ass man, I can figure this out. Yeah, that’s only debt, what the hell are you talking about?

Steve Rhode: Well, you know what, you’re smart, you’re successful, you’ve solved a lot of complex problems in your life. Even at your job, people look up to you because you know what’s going on. So why would you need help getting out of debt? That’s stupid, right? Anybody can figure it out, right? You can figure out debt on your own. Well, maybe, but probably not. And today we want to talk about the “I’ll figure it out myself” mentality, which serves you so well in most areas of your life, but might be the absolute thing that’s keeping you stuck in this debt rut that you’re in.

News Stories: Personal Loans Booming

Steve Rhode: Before we get to that, Damon, let’s talk about the latest posts that are out on the GetOutOfDebt.org website. I’ve been posting full lately, and there are some stories that caught your attention.

Damon Day: Yeah, there’s lots of good stuff on there, but I’ve got three picked out today. The one I wanted to start with is one that I hear from almost every client — every person that calls has this issue. And the title of the article is “Personal Loans Are Booming: When Consolidation Helps and When It Doesn’t.” And when we’re talking about do-it-yourself traps, this actually really ties in because the “oh, I’ll get a consolidation loan at a lower rate to pay off these credit cards” is one of the biggest “I’ll do it myself to get out of debt” traps that I see. I’m not saying it can’t work, but most of the time it’s just a trap because people are focused on the wrong thing. They’re focused on “it’s gonna lower my rate.” And they don’t focus on: it’s still gonna choke off my cash flow and put me in a place where I’m gonna be right back to having to use my credit cards again. And before I know it, I still have the loan that I got out to pay off the credit cards, and now I have debt back on the credit cards.

Steve Rhode: The marketing is “consolidate your debt, get one lower rate, pay off your cards faster.” The reality is: come here, sucker. I’m already drowning — shift it over here so we can get a whole bunch of payments for a while. And then we’ll just help you kick the can down the road. So you’ll just be drowning in a bigger puddle later. But in the meantime, we’ll make a whole bunch of money off you.

Damon Day: Yeah, that marketing is not as good. And before we dive into this article real quick, I will say — if you are in debt and you’re thinking about “I’ll fix it with a consolidation loan,” schedule a call with me first. Let’s talk it through because honestly, sometimes there are great reasons to get a consolidation loan. But using that money dollar for dollar to pay off credit card debt is not always the best use of that money. So before you get the loan and do something you can’t undo, call me first. So many people call me after they’ve done it. And it’s like, yeah, I’ve got this loan and I’ve got all this credit card debt again. Can I still fix it? Yes, I can. But it’s a lot harder and a lot more expensive than if you would have called me and we had a plan before you just grabbed the loan.

Steve Rhode: Your DIY shelf is almost always more expensive because you don’t know what you don’t know. So you can get in touch with Damon by going to his website, DamonDay — D-A-M-O-N-D-A-Y dot com.

Damon Day: So let’s talk about who’s taking out these loans, because the figure from this story that struck me most was that it’s the subprime people who are taking out more loans — subprime origination on these debt consolidation loans went up 32% year over year. That’s a big number. And this is where people are turning to get cash. With inflation and everything that’s going on, credit cards get maxed out, they can’t afford the payments, and they think “oh, get a consolidation loan and that’ll fix it.” But the underlying issue is you’ve got more money going out than you’ve got coming in. And the biggest trap on these consolidation loans that people never think about — the amortization. The time you’re going to pay back this loan is only usually five years. So when you take this loan and pay off credit card debt, even if it’s at a lower interest rate, oftentimes the payments for that consolidation loan are now bigger than the minimum payments were on the credit cards that you consolidated, because those credit cards were amortized over 15 or 20 years. So now you’ve got this new loan at what you think is better because it’s a lower rate, but your cash flow is just as bad — if not worse — than it was before. And if that didn’t get addressed, you’re still in the same problem.

Steve Rhode: The debt was just the symptom.

Damon Day: Right. The problem was the cash flow. And you didn’t fix that. So it’s no wonder that within six months or a year you are going to be back in credit card debt again. But this time the problem is exacerbated because now you’ve got a $700 a month personal loan payment on top of the new minimum payments. What makes this an even harder trap for people with higher incomes is it’s just easier to get the loan, so it’s easier to fall into the trap. What are most people doing with these types of loans? 40% are consolidating debts, 11% are paying off credit cards, 9% are covering everyday bills, 7% are thinking about home improvements. But the majority are trying to tackle a debt situation. And it just multiplies it.

Merchant Cash Advances: The Business Debt Trap

Damon Day: So the next story caught my eye. This one pertains to those of you that have businesses. And Steve and I have been seeing this for over a decade now — these loans, these merchant cash advances. The article is “Merchant Cash Advances Are Driving Small Businesses into Bankruptcy.” For those of you that don’t know what these are, it’s essentially like a payday loan for a business. And it is horrible. They create vicious cycles for businesses. These are a trap 100%. If you are short on cash and you’re like, “I’m going to go to one of these MCAs and just borrow money, fix it next month, get out of it” — there’s a good chance you could be looking at a bankruptcy eventually. These things are absolute nightmares where they will latch onto your future cash flow.

Steve Rhode: Well, it’s one of these things where this is a “business transaction” — I’m doing air quotes. There are different rules that apply between consumer transactions and business transactions. This has been a kind of big loophole over many years, considered to be a more sophisticated transaction, so that you as a business are supposed to know better. Here’s how it works: MCA funders charge a factor rate. They don’t say it’s an interest rate — they call it a factor rate. It’s typically between 1.1 to 1.5 times what you borrow. So if you took $100,000, you’re going to repay up to $150,000, with daily or weekly automatic withdrawals from your business bank account. That turns out to be 100% or 200% annual rate.

Damon Day: They latch onto your actual cash flow and they get their money before you do. These MCAs are tentacles in and standing on business. They cloak themselves in this whole “oh, we’re only working with businesses, this isn’t a loan.” They do whatever they can to try to skirt any laws that are there to protect consumers. Because an actual bank could not do what these guys are doing. So when we talk about the 100%, 200% interest rate — they don’t call it an interest rate. They just say, “No no no, it’s a factor. We’re purchasing future receivables.” What that means is as soon as you get that deal, it gives you that cash now to make your payroll or whatever. But if your revenue is not about to spike, that’s just going to give you a temporary shot in the arm, allow you to fight another 30, 60 days. And then before you notice it, you’ve got this monkey on your back for $4,000 a month. Revenue hasn’t picked up. Now what do you do? You need another MCA. And then another. And you stack and you stack and you stack. Even if revenue starts to get better, if it doesn’t grow faster than your MCA stack, you are quickly running toward a Chapter 11.

Steve Rhode: Do you help people with MCA problems?

Damon Day: I can help them overall. I don’t get involved directly in negotiating with MCAs because they’re bastards. But I can help with advice on how to deal with them. Sometimes it’s not just the MCAs we’re dealing with — it’s a lot of things. Sometimes there are things we can do to quickly free up some cash flow in the short term so we can get the MCA off their back. Sometimes I can do some negotiating with them, but they don’t negotiate like consumer credit cards and personal loans because they don’t have to. They’re not required to follow the same rules. So yes, I can still potentially get you out of the overall problem you’re in. You can reach me at DamonDay.com.

Closing Paid-Off Credit Cards: Why the Math Disagrees

Damon Day: The third story — this one’s more of a PSA. The title is “Closing a Credit Card Account: Feels Like the Right Move, But Here’s Why the Math Disagrees.” I see this a lot when people are DIY-ing their way out of debt. They think, “Okay, I’ve got all these cards. I’m going to get these cards paid off and I’m going to close them. Cut them up. Never use them again.” Do not do that. Pay them off — fine. Do not close them. Just leave them open.

Steve Rhode: I know Dave Ramsey will disagree with that advice. But if you want to hurt your credit more, close them. People are always worried about their credit when they call me: “How do I fix this without hurting my credit?” And they’ve already closed cards. It’s like — one way you can try not to hurt your credit is don’t close a card after you’ve paid it off. Leave it open. Just let it go. Let it sit out there and help your utilization rate.

Damon Day: Here’s my take. If you have Dave Ramsey’s money, then Dave Ramsey’s advice on credit is fine. But until you get to Dave Ramsey’s level, his advice on credit should be taken with a grain of — well, that’s coming from a guy that doesn’t need credit. He said once that if he needed an apartment, he’d just write a check and buy the building. Good for you, Dave. Most of us peons might need to have a decent credit score to lease an apartment.

Steve Rhode: The reason it’s damaging to close your oldest accounts: 15% of your credit score is your length of credit history, and 35% is your payment history. Here’s what to do with an old card that has a high interest rate — don’t close it, just don’t use it. Or use it once every six months, make a small transaction, pay it off immediately. Or put your Netflix subscription on it and set autopay to pay the balance in full every month. It keeps the account active, you’re not paying any interest, and you’re preserving that history.

Damon Day: And here’s a trick — if you have a card with an annual fee you don’t want to pay anymore: most of the time you can actually downgrade that card. A lot of creditors like American Express or Chase have lower-tiered cards without an annual fee that you can ask them to downgrade to. You keep all the history, you get rid of the annual fee. I did that with my Amex Platinum when the fee went up to around $600 a year — downgraded to the Gold card and kept all the account history.

Steve Rhode: Let me give an example about utilization. Say you have two cards, each with a $5,000 limit — $10,000 total available credit. You carry a $2,000 balance on the first card. Your utilization rate is 20%. You decide to close one card. Now your total available credit drops to $5,000. You still owe the $2,000. Now your utilization rate is 40%. And it gets worse — as that utilization starts to creep up, a creditor might do a random credit check, see your score has gone down, and decide to reduce your credit limit. That makes utilization go even higher. And then the next creditor sees that and it looks even worse. Before you know it, you went from 30% utilization to 80% utilization with the exact same amount of debt.

Why Smart People Get Stuck in the DIY Trap

Steve Rhode: So let’s get into why smart people think they can DIY their way out. High earners are used to being the experts in the room. They have a lot of self-confidence, self-esteem, self-worth. Nothing’s going to stop me — and asking for help feels like admitting failure or incompetence. And there’s always Reddit, right? Don’t get your advice on how to get out of debt on Reddit. I’ve seen so many people say, “I read on Reddit that you just don’t pay them and then eventually they’ll be so desperate you’ll get a 10 cent on the dollar offer.” So they were waiting for that. And now they’ve got four lawsuits.

Damon Day: Here’s what DIY actually looks like. You spend months kind of percolating — things start getting tight, you do some research, you think you’ve come up with a solution. And then you just hit that wall of “I don’t really feel like I know what I’m doing, I don’t want to make it worse.” And so nothing happens. More time passes. It gets worse, not better. We have a word for that — paralysis by analysis. You want-to-what-if it to death.

Steve Rhode: And creditors are more litigious now than ever. I’ve been helping people with this stuff for 25 years and this is the most litigious environment I’ve seen. That doesn’t mean you panic — it just means you have to have a plan. You have to be prepared and understand which creditors are aggressive, how litigious are they going to get, am I going to get sued, what kind of timeline am I looking at?

Damon Day: Even when you buy a piece of furniture and put it together yourself, you still follow instructions. We’re not saying you can’t do anything yourself. But if you’re going to take on creditors, at minimum get some advice before you do it. Talk to someone like me — I do a free consult in the beginning anyway, and I give a ton of information, whether a client hires me or not. Some people get enough information from that first call. That’s kind of my problem — I give them enough to be dangerous to themselves, and then they go, “Oh, I’ve got this figured out now.” But you know, some people get enough to take action correctly. For everyone else, I say: at minimum, get advice from someone who’s been there, done that, got the t-shirt and hat to match, and can tell you the pitfalls before you run into them.

The Key Difference: Strategy vs. Sales Pitch

Steve Rhode: The bottom line is we’re not saying you cannot negotiate debts or come up with a plan to get yourself out. But you want to go about it in an intelligent way — with a plan. And the best way to do that is talk to somebody that can give you a strategy for your specific situation.

Damon Day: And that’s what I do that’s very different. When you call a bankruptcy attorney, a credit counseling company, a debt settlement company, a debt consolidator — nobody does what I do. Nobody is going to sit down with you and help you come up with a strategy. They’re going to sit down with you and sell you the strategy that they have. If you want an actual plan, call me.

Steve Rhode: It’s like saying you should go to the Ford dealer and ask them which Chevy model you should buy. That’s ridiculous. So don’t go to any debt relief company and ask them about your other options. They’re going to sell you the Ford. Every company you call is the best. They have the best plan. They don’t know anything about your situation, but they’ve got the best solution already. And just today I’ve been writing two guides about how to see through Trustpilot ratings and BBB reviews. If you have the philosophy that everything is bullshit until proven otherwise, you’ll do well in life.

The “Paralysis” Problem and Moving Forward

Damon Day: The other thing that happens when you try to DIY it is: you research, research, research, think you’ve come up with a solution, and then hit the wall of “I don’t really feel like I know what I’m doing, I don’t want to make it worse.” So nothing happens. More time passes. It gets worse, not better.

Steve Rhode: You have the most options right now. Every time you implement something — I’m gonna try this, I’m gonna do that — that takes away options. If you come to me after you’ve exhausted all the options you can think of, I can still help you, but the options are more limited than they were if you’d come to me when you first went, “Hmm, I think I’ve got an issue.” Before you start throwing things at the wall, maybe talk to someone like Damon first and get some ideas while you still have plenty of options on the table before you close those doors unknowingly.

Looking Ahead: Next Episode

Steve Rhode: Next week we’re going to get ahead of a dangerous myth — the idea that your tax refund is going to save you. It happens every year. Your tax refund won’t save you. We’ll talk about the math and show you exactly why waiting for April is a mistake.

Damon Day: Thinking your tax refund will save you is the same thinking as “this consolidation loan is going to fix it.” It’s the same thing. Call me before you use your tax refund to just pay off some credit card debt. Call me first while you still have the cash.

Steve Rhode: So we’re two months in and you’ve been with us since December. You’ve already learned more than most people will ever know about debt. The question is, what are you going to do with that knowledge? Keep listening. Let’s figure it out.

Damon Day: Self-assessment time: have you been figuring it out yourself for more than three months without significant progress? If yes, maybe it’s time to at least explore professional help. Schedule a free consultation somewhere this week — preferably with me, but you do you. Just to see what’s out there. You don’t get extra points for suffering alone. Getting help is not weakness — it’s wisdom. The strongest people know when to call in reinforcements.

Steve Rhode: Damon, until next time, I’ll see ya.

Damon Day: Take care, everyone.