Borrowing from Peter to Pay Paul

You have probably heard the term before and you have probably done it - most of us have.

However, 'borrowing from Peter to pay Paul' is detrimental to your long-term financial well-being and debt management. When we employ this tactic, we are doing one of two things - or perhaps even both things at the same time:

1. We are putting off paying debt that will still be there tomorrow and/or;

2. We are creating even more debt.

There are various ways that we borrow from Peter to pay Paul and the first step we can take to avoid doing so, is by recognizing those methods.

Paying any debt or bill with a credit card is borrowing from Peter to pay Paul - and it also creates additional debt in the form of interest charges. When you pay with a credit card, the debt is simply transferred from one creditor to another, with additional interest added. This is the most common form of borrowing from Peter to pay Paul.

You should never pay regular bills with your credit card unless you are prepared to pay off the entire balance of the credit card bill on its payment date to avoid interest. People often do this to make their personal accounting easier. Instead of having to keep up with a multitude of papers and receipts, at the end of the month or year, all they really need is their credit card statements.

Taking out a bank loan, credit union loan, or small loan from a finance company to pay off bills is borrowing from Peter to pay Paul. However, in some instances this is a viable debt reduction plan, depending on the interest rate charged. For instance, if you take out a bank loan at an interest rate of 6% to pay off a large credit card balance that carries a 9% interest rate, this is a good thing - but only if you immediately cut that credit card up and never use it again - and as long as you get the bank loan paid off in a timely manner. Otherwise, you are really just prolonging debt.

Borrowing from a friend to pay a bill, taking cash advances on credit cards, getting an advance through work and refinancing your home or other high ticket possessions are all methods of borrowing from Peter to pay Paul. While we cannot always avoid this practice, make sure that you do not do any of these things without putting a great deal of thought into it. Do not just think about how it will solve today’s problems, also pay careful attention to the problems that it will create for tomorrow, next week, next month, next year, or the years to come.

Your best option, if you are having difficulty paying a bill, is to contact the person or organization that you owe money to and work out a repayment plan. For instance, many automobile finance companies will work with you and attach the payment you are having trouble making to the end of the note. Banks also commonly do this. Utility companies will often split the payment up and add smaller chunks of the payment to future bills. However, they will not do this for you month after month, but it can buy you a breathing space of at least thirty days to come up with a solution, or to get back on track financially.