I still remember about a year after I was married and my wife and I moved to a small rental home. It wasn’t very big, but we were excited to be out of an apartment for the first time. We had a new baby and a new place to live. After we moved in, we realized it was time for us to buy some furniture. We needed a headboard for our bed, a coffee table, a dresser, and an entertainment center. So we headed out to the furniture store where they had unfinished oak furniture and we bought some furniture.
We shopped for a couple hours and saw lots of nice furniture. In the end, we found four nice pieces of unfinished oak furniture that we liked. When we went to purchase though, we didn’t have the money to pay for it. But the store offered credit and we sat down and filled out the paperwork. A short while later, we were on our way with our new furniture that we didn’t have to pay for. We were also on our way to living with unsecured debt.
Credit card debt usually starts innocently
Now being a math nerd, I knew I could afford the minimum payments and besides, we had only spent about $700. So we waited for the first statement to come in the mail. After it arrived, I wrote a check, and we were on our way to paying off the credit company. It all sounds fine so far. We had our new furniture, and had already made our first payment. But this was only the beginning.
During that period, we needed a little bit more stuff around the new house. We also needed some stain and polyurethane for our new furniture. Since we didn’t have the money for the furniture, we didn’t really have any for the extra other minor things we needed. Therefore, it was time to start using the credit cards. We told ourselves that it was only a couple things, and we would pay it off quickly. And that is how we justified spending the extra money we couldn’t afford.
The sales pitch for credit card debt
Some of you can probably relate to this. As a young adult, almost all of us receive credit card offers in the mail. They mostly tell us that we are pre-approved. Those same advertisements will also say that there is no interest for a while. It all sounds so enticing and exciting. A bank has noticed that I am a good handler of money and wants to let me borrow some of theirs so that I can make some purchases and pay the money back later. Who can resist that?
The other one that we see is from the department stores. When we go in to buy something at the store, many times at the checkout we will receive an offer. Usually, the clerk tells us we can save 5 percent if we sign up for store credit. Or we see an ad at the register or on the product that says no interest on payments for 18 months. They are all a little different, but why would I want to spend money today, if I can just hang on to it, and pay for something later?
The catch with those offers for credit
The offers sound really good. It’s free money and a lot of it. There is also so much generosity because there is little to no interest and you can take your time paying for stuff. However, in the small print are minor details. Some of those say that if you are ever late, you will start paying interest immediately. Others say that if you don’t pay the balance in full by the deadline, you are responsible for all of the interest for the entire length of the term.
We never intend for those things to happen. The problem is that we never know when an emergency might come up that prevents us from paying a bill on time, or being able to pay a bill in full due to a hardship. The point is, the credit card companies know that these things will happen and that they will make some money on some people and that makes it worth the risk for them.
Why credit card debt grows and becomes a problem
One of our issues after the furniture purchase was that we didn’t make a lot of money. But that wasn’t the main issue. In fact, that wasn’t really an issue at all. Many of you probably read that first line, and thought the same thing. Having a lower income does present some problems. It makes lifestyle difficult and can be very frustrating. However, our the level of our income wasn’t the problem.
What we were dealing with was a money management problem. For many years, we had never thought that it would be a good idea to create a manageable budget for ourselves. Instead, I just knew how much I made and had balances to look at. I knew we shouldn’t spend too much, but that was never defined. I knew how much we spent in certain categories because I tracked it all. Still, we didn’t create a budget.
Bad solutions that don’t fix the problem of growing credit card debt
Instead of managing a budget, we tried to not spend money. That doesn’t work because you need stuff. Then the other problem is that we “needed” stuff. At least, we thought we needed stuff. We ended up buying a lot of smaller things that we probably could have done without. So when money was tight, we said no more spending, but we were short on groceries or diapers and had to spend a little bit more that week.
As the credit card balances slowly started to rise, we had to think of something different. So I thought that we would just spend less next month and pay off some of the debt with that margin. We could cut back and not buy some of the things we needed temporarily. Sounds like a good idea in theory. But the problem was that even if we succeeded for one month, we wouldn’t likely succeed for two. We were used to buying certain things and only were willing to make very short lived changes.
The next thought was, we need to make more money. I told myself, “providing for a family is too expensive for what I make”. So I knew that I needed a raise to solve the problem. All the while, I would see things that I wanted badly like a new video game, or a new TV, or a newer car. I now had contentment issues on top of everything else. Making more money wasn’t going to solve the problem. I’d more than likely treat myself to something cool if I got a bonus or a raise.
When you realize that you have a really big problem.
Eventually those small statement balances grow significantly. You can pick any number your like, but after a while of living the way we were, the balances get out of control. This is when credit card debt becomes a big problem. That small furniture debt a couple years ago, had grown into multiple credit accounts. There were multiple payments due, and we were struggling.
Now, the interest was becoming an issue. The interest charged on these credit cards was only a few dollars in the beginning. Now we were well over $100 per month. This had become it’s own monthly bill. The debt was way too high, but now the interest was moving it in the wrong direction even faster.
More bad solutions that don’t fix the problem either
At this point, we tried to get creative. Maybe you have tried this to. Advertisements would come that would offer us to transfer a balance to a new card for zero percent. This sounded like a great plan. We could, for a time, halt the interest payments and get ahead on the debt.
The first problem with this is the bank fees. There was a fee due for transferring the money from one credit card to another one. We would save money for a few months, but not the first month. We were going to have to spend extra money the first month, and then save some money down the road.
The second problem is that we still had not solved the main problem. Saving money on interest was great. However, the large balance on the credit cards hadn’t just accidentally happened. This was a process of poor decisions regarding spending, and lack of a plan. In other words if you still don’t have a budget in place, the debt will continue to grow even if you can save on interest for a while.
The right solution to deal with credit card debt
In order to reverse the direction of this problem, something drastic has to be done. At this point, desperation is likely settling in. You have likely realized that you cannot out earn your bad habits and poor decision making. More income will probably just yield more spending. That will just continue to exacerbate the problem only making things worse.
Create a budget
The first solution is to create a manageable budget. This is a process, but you need to have a written budget that you can use. This takes work, but is the first step. You need to create margin in your budget in order to apply that to the credit card debt. If you are struggling with this step, this is where financial coaching can be a helpful tool and possibly a necessary tool in order to get moving in the right direction.
Stop using the credit cards
Credit card debt can be stopped very quickly if you don’t use the cards at all. However, this can’t be done unless you have a budget that allows you to live your life without overspending. Once the budget is in good working order, my personal preference is to cut up the credit card. You can’t use it if it physically won’t work. It sounds crazy, but if you are struggling with a lot of credit card debt, you might need something crazy.
On the road to victory
With discipline and hard work, you can overcome credit card debt. Depending on the balance due, or your income level this can be difficult. You might have to make sacrifices in lifestyle and have to learn to be content with less than what you are used to. I think these sacrifices and the work are worth it.
I cut up my credit card and still have the pieces in a drawer at my office. It helped me to get going in the right direction. And now, it is a reminder to me that I hate credit card debt. It reminds me that I was able to make it through and overcome credit card debt. And I’m sure you can do it too.