Why credit cards are a black hole that suck your money.
This is not a post to shame you for using credit cards. I have them. Your friends have them. Your boss has them. So let's just get the shame thing out of the way. As Elsa says, "Let it go! Let it go!" This week's topic IS, however, meant to offer you some tough numbers and even tougher love about how/why you keep swiping that credit card...and what it will feel like when you are finally free of the debt.
At the end of 2018, the Consumer Financial Protection Agency (Thanks Elizabeth Warren!) reports that total credit cards balances were around $900 billion dollars. So, to say that the U.S. is in a blackhole of debt would be putting it kindly. It's almost like credit card companies want us in debt -- oh wait they do.
Over the past several decades credit card companies have invented lots of ways to keep customers coming back for more. They entice college students with points as a "reward" for charging meals or gas. They entice struggling families by offering a 0% APR period on balance transfers as a vague option to reduce debt. They convince folks like you and me that a slow build up of airline miles is worth all the fees and interest. Spoiler alert: it's not.
I can't tell you there aren't benefits to credit cards, but it is my humble opinion that these are only benefits if you have the means to pay off your credit after receiving the reward. Honestly, how many of us really do that? We swipe the card, validate it with an "I need this" or "I'll pay this amount extra next due date" and never actually make progress toward relieving ourselves of this awful debt. And don't get me started on minimum payments. That's probably the biggest scam of all because no one will convince me that the "minimum payment" isn't designed (re: meticulously calculated by the credit card companies) to keep you in debt.
"But Wes," you offer, "I am paying more than the minimum each month!" Excellent -- good for you! How much more? What's the percentage of your debt you pay down each month? My suspicion is that most of us never really looked at these numbers so I'll break it down for you:
Example: You have a $2,000 credit with a 12% interest rate (lucky you!) and your minimum payment due each month is $50. But now your balance is $1,850, right? [insert buzz noise] No, because you were also charged $20 in interest. That 50 bucks turned into 30 and only pays down your principal by 1.5%. Can you see now why this would take you over four years to pay off a measly $2,000?
Now that we agree that a minimum balance is designed to keep you indebted to the credit card company -- what's the solution? Well, there are 2 steps:
1) Stop charging on the credit card
2) Put all extra money toward your debt
It may seem difficult, but the first and most important decision to reduce your credit card debt is to stop charging. The truth is, you don't have this money to spend or you would use your debit card and walk away. We can get into the nitty gritty on charging certain streaming platforms or recurring bills in order to receive a rewards benefit (aka: cash back) but that's for folks who have a good handle on reducing their debt. If you bill your Hulu/Spotify to your credit card and don't pay the monthly payment + Hulu/Spotify here's a wake up call: the benefit will never exceed the cost. The math simply doesn't add up...which is why we avoid the math. I get it, I also hate the math!
Now that you've promised to never swipe that credit card unless there's a true emergency (see last week's post about tacos not qualifying) you can move on to step two: attack the debt. There are a few popular approaches like the Snowball and Avalanche methods. The overall theme of any debt-reduction plan is that all extra money goes toward the credit card.
Take that $2,000 credit card amount with 12% interest. Paying an extra $300 reduces the life of this debt from 4 years to 6 months. Doesn't that seem significant? I didn't even discuss the difference in how much extra you pay in interest in the first scenario: it's around $490 over the life of that debt. If you want to calculate these numbers yourself use Credit Karma's simple online tool here.
If you want help with your budget send me an email at firstname.lastname@example.org. I would love to assist you with your finances and the session is completely free!
Now go for a walk and drink a glass of water. Knowledge is power and you needn't be powerless when it comes to your finances.
You can absolutely do this!