Why You Shouldn’t Pay Off Your Debt (Entirely)

When I was a mortgage broker in 2005, it was a common practice to bundle homeowners’ debts into their refinance or their purchase. The rationalization was that a person could start fresh, with zero unsecured debt, and stay that way. Some of the lenders even made that a criteria in providing the loan to the homeowner.

Ten years earlier, I had done exactly that when I purchased my first home.

I thought it was a cool idea and loved the sensation of feeling debt-free (except for my mortgage payment). I felt unburdened and proud of myself. I had worked hard building my construction business so that I could afford the home’s down payment and monthly obligations from then on.

But it never dawned on me that my credit card debt was a sign of living beyond my means.

It never occurred to me that my small savings account, with irregular contributions, was a clue to a bigger problem. 

It never entered my mind that I was in denial about how I mismanaged my finances.

I had what could be called voluntary blindness.

Borrowing from “yo-yo dieting,” this was yo-yo debt, and I was under the delusion that paying off my debts, even when I was accumulating new debt to replace the old, meant I was grounded in my ability to manage my finances.

Fast-forward to 2005, when I created a niche market in the mortgage industry, focusing on helping women get refinancing when they were coming out of bankruptcy.

I always asked them how they ended up in bankruptcy, and they all had similar answers. It always came down to not managing their money as well as they believed they had, through one route or another.

As I listened to their stories, my denial about my own situation was so powerful that I could practically hear myself reframing it in my mind. I refused to see the truth. In those days, there were no financial therapists — no one even talked about the emotional connection between self-esteem and money.

It was not until my life unraveled in 2007 that I understood the connection between how I felt about myself and the need I had to stay in a negative debt posture — and how that, in part, defined who I was. Completely taking my debt away just made me hungry to bring the debt back, so I could feel “myself.”

Understanding that piece gave me clarity on finding the solution: Keep some debt. Don’t pay it all it off quite yet. Since I was committed to healing and being free, I trusted that someday I would get a grip on feeling so undeserving, and the need for the negative definition would evaporate along with the remaining debt. My theory worked, and continues on with all of my clients.

Pegi Burdick is a member of the DailyWorth Connect program. Read more about the program here.

Sign up for your 30-minute free session today. Get “What’s Holding You Back?”, chapter two of my book It’s NEVER About the Money … Even When It Is, by signing up for my newsletter at The Financial Whisperer. Twitter: @emotionandmoney.