Get Out of Credit Card Debt! Now!”
This post is a companion piece to C-Realm’s KMO interviewing me on an Episode entitled “Stop Digging.”
I’d like to dedicate this post to you, KMO.
We’re often told in the PO community “get out of debt,” and yet, as we continue to pay the minimum on the credit card each month, it appears to have little effect on the overall balance of the bill. Should we forget about getting out of debt and just start putting up supplies? Not unless you have a crystal ball that tells you when all US banks will fail, and that whatever entity takes them over will be unable to figure out how to collect your monthly payments. That’s a huge pool of money to ignore, now, isn’t it?
I’d suggest you seriously consider getting out of debt, rather than hoping that your debt will disappear. How can you begin to accomplish this task?
In a graduate course I taught a few semesters back entitled: “Sex and Money,” I spoke about credit card debt and presented the strategy I describe below. All of my students felt it to be very useful. I offer it to you here, described using a hypothetical couple, the Balinski’s. I hope you will “tune in, turn on, and take heart”, to quote the C-Realm Podcast.
Robin and Ben Balinski, each 32 years old, were $8,667.78 in credit card debt, when they heard the broadcast. (This is about the US average.) They learned this, after gathering up their various credit card statements, and adding them up. It was a task they had avoided. The amount totally overwhelmed them emotionally. The number of cards, and totals on each one, kept creeping up over the last six years. Robin had cut down her weekly employment when she had her second child, and the family’s expenses continued to climb. The couple made up the difference using “plastic.” Here is a breakdown of what they owed:
|Credit Card||Bank||Interest Rate||Amount|
|Visa||Bank of State I||32.99%||$1,788.27|
|Discover||Allforfree Bank||16.99%||$ 984.38|
|American Express||URLocal Bank||14.99%||$2,822.92|
|Visa II||Bank of State II||8.99% (teaser rate)||$ 813.77|
Although the prospects of ever getting out of debt seemed bleak, the Balinski’s decided to go ahead, anyway and see how they might do it. They first listed their credit cards on a chart like the one above, putting the card with the highest rate of interest at the top. Notice the usury interest rate on Visa I of 32.99%. It was so high because the Balinski’s were 1-3 days late in their payment at two different times, over the past six months. What they don’t realize is that should they max out all of their cards, the “special introductory offers” will end, and, often in unison, all of their credit card interests rates will jump. It’s also in the fine print that being late on any of your bills allows the credit card companies to adjust their rates upward. They usually wait, however, until you’ve lost the opportunity to transfer your balances.
The Balinski’s looked at the bad news: If they paid only the minimum on each credit card, how long would it take and how much money would they pay in interest payments?
|Card Name:||Minimum Pymt of:||it would take them||in interest payments||minimum payment calculated|
|Visa I||$53.65||763 months||$16,587.52||3%|
|Mastercard||$56.46||502 months||$ 9,760.07||2.5%|
|Discover||$24.61||60 months||$ 478.62||2.5%|
|Am Ex||$70.57||212 months||$2,581.08||2.5%|
|Visa II||$24.41 (teaser)||6 months||$ 34.55||2.5%|
|Visa II||$20.34||47 months||$ 265.88||2.5%|
(check your own cards at www. http://www.bankrate.com/brm/calc/MinPayment.asp)
It would take then 63 YEARS and $29,707.72 in interest payments on an original debt of $8,667.78 if they continued on the path they were on! No wonder the Balinski’s felt overwhelmed by their debt! There had to be a better way.
If You are In a Financial Hole, STOP DIGGING!
They decided to implement my suggestion that “if you are in a hole financially, stop digging.” They figured out that they usually spent about $1000 a month in credit card charges. So, instead of continuing to use their credit cards each month, they withdrew $500 from their checking accounts, twice a month. When that amount was gone, they waited until the next paychecks were issued, before they continued their spending.
Next, they went to work figuring out how to pay down their credit cards.
“How long would it take to pay off ‘that top card ‘ by paying $100 a month on it, instead of the $53.65 minimum payment?” they asked. They determined that at $100, a month, it would take 25 months to pay off that Visa I card, and over that time, they would have spent $706.68 in interest charges which seemed like a lot of money (but of course minuscule compared to $16,587.52 in interest charges they’d be paying at only the minimum.)
Next, they asked “How much would it cost to pay off this card in one year’s time?” The answer was a $180. monthly payment (instead of $53.65 or $126.35 more principle payment) or $26.38 a week AS LONG AS THEY RAN UP NO ADDITIONAL CHARGES TO ANY OF THEIR CARDS!
They would wind up paying a total of $329.51 in interest charges over about an 11 month period. They decided that this would be their goal. They then totaled up all the other minimum charges they were responsible for each month.
Here’s what their credit card payments looked like that first year:
|$ 70.57||American Express|
|$ 20.34||Visa II|
|$196.35||Total Ongoing monthly minimum payments|
|$ 53.65||Targeted Card:Visa I|
|$126.35||Targeted Additional Payment|
|$180.00||Total to pay toward Visa I credit card|
Therefore, their total Monthly income directed toward credit card debt would now be raised by an additional $126.35 to $376.35 per month or $4516.20 per year. That’s quite a chunk!
Where would that additional money come from?
Robin and Ben never considered themselves “extravagant” people, but they came to see that it was inattention, more than huge “extravagances” that got them into this mess. In a former article: 26 Things You Can Do RIGHT NOW To Manage Your Anxiety, I suggested that you Set up a THREE TIER SYSTEM for purchases as follows: a) “necessities;” b) “conveniences;” and c) “other” and put everything you buy in one of these categories for a week. That’s what the Balinski’s did.
Ben never gave much thought to the coffee and breakfast pastry he bought before work, that cost him less than $5.00 every day. It was one of those “insignificant” expenses. But when he added it up, it cost him over $1170 a year! He put it into the “convenience” category. (Robin thought it belonged in “other!”) The dry cleaning that seemed to be so “necessary” to them, fell into the “other” category, (although Robin thought of it as a “convenience!”) However, when they figured out that these sorts of expenses might be costing them a lifetime of debt, it was easier to change their spending patterns.
Every family has to ask themselves where they would put each of their purchases, and then to carefully assess whether any of their “conveniences” and “other” purchases are worth the tremendous burden of debt they end up paying for them when they carry credit card debt.
Here was a breakdown of spending cutbacks the Balinski’s were going to be implementing:
|Ben’s week-day visit to gourmet coffee shop||$1,170.00|
|Dry cleaning ($50 week)||$2,600.00|
|Electric Bill reduction||$ 240.00|
|Food Shopping cuts ($15/week)||$ 780.00|
|Romantic Fall week-end getaway (ouch!!)||$1,500.00|
They found that they could free up more than the entire monthly credit card debt! They decided that the difference would be put toward “savings” (something they weren’t able to accomplish in the past), storing some bulk food and supplies, and any “unexpected” expenses they had previously paid for with credit cards.
Each month, for the next 11 months, Ben and Robin’s goal was to pay $180.00 instead of $53.65 on their Visa card. They succeeded all but once. Therefore, it took them 12 months instead of 763 months to pay off Visa I and they ended up spending $329.61 in interest instead of $16,587.52!
Here’s what the Balinski’s debt looked like at the start of Year Two:
|Credit Card||Interest Rate||Starting Amount||Amount Owed 13 months|
(after 6 month teaser rate
and after 1 yr)
Their next step was to pay down the Mastercard bill. They did this by taking not only the same additional $126.35, but now ADDING the previous minimum payment they used to pay to the Visa I card. It looked like this:
Total now used to pay down Mastercard credit card:
|Minimum Payment||Credit Card|
|$ 53.65||Amount they USED to pay to Visa I|
|$126.35||Additional Payment that USED to go to Visa I|
|Ongoing Minimum payments:|
|$ 70.57||American Express|
|$ 20.34||Visa II|
|$115.52||Ongoing monthly minimum payments|
Paying only the minimum on their Mastercard over the past 12 months, they managed to pay just $119.33 in principle, and they were still left with a huge balance, but that was soon to change. It will take them just 11 months to pay off their Mastercard, at $236.46 per month, and they will end up paying $286.38 in interest, instead of $9163.54 if they had continued to pay the minimum.
Again, they ran into trouble, and it took them 12 instead of 11 months, to pay off their Mastercard. Their debt now looked like this:
BALINSKI debt at the start of Year Three:
|Credit Card||Interest Rate||Starting Amount||Amount Owed at 25 months|
|Discover||16.99%||$ 984.38||$ 749.73|
|$ 813.77||$ 604.74|
They also discovered an interesting fact: The “teaser” rate of 8.99% had jumped to 17.99% after the first 6 months, so Visa II was moved up their chart, as it now contained a higher interest rate than American Express. They recognized that all of the time Ben spend locating the “teaser rate” card and filling out the application (never mind how “easy” it was to use this “low interest card”) had actually saved $26.51 over the six month period, or about a dollar a week. Had they been late for just one payment, they would have spent more on the late charges!
At the start of the third year, the Balinski’s made a tough decision: The two sons would not go to sleep-away camp this year, for their normal month-long stay. They had managed to save only $3000 toward the camp, and the camp cost over $11,000. Normally, they would put the balance on their credit cards, but not this year! Instead, they took $700 of the money they had saved, and took out a family membership to the YMCA in town, and put the remaining $2300 to pay off (you guessed it!) credit card debt:
Start of Year Three Debt after applying savings earmarked for sons’ camp:
|Credit Card||Interest Rate||Starting Amount||Amount Owed after applying savings|
|Visa II||18% (teaser ended)||$ 813.77||$0|
Here is the amount of cash available to pay toward the final credit card bill:
|Minimum Payment||Credit Card|
|$ 70.57||American Express ongoing monthly minimum payments|
|$ 56.46||Amount they USED to pay Mastercard|
|$ 53.65||Amount they USED to pay Visa|
|$ 24.61||Amount they USED to pay Discover|
|$ 20.34||Amount they USED to pay Visa II|
|$351.98||Total additional amount available toward American Express credit card|
Paying $351.98 toward the American Express bill, the Balinski’s were debt-free in four more months, with an additional $30.22 in interest charges. In 27 months, they had accomplished what, previously, they considered “overwhelming.” Let’s review how they accomplished this:
- They had to learn to live on a cash economy. It wasn’t easy, initially, and they “cheated” several times, during the first several months. Eventually, however, they figured out where they overspent, and self-corrected. They also learned that they could spend even less than the $1000 per month that they had allotted. As credit card companies found out long ago, Ben and Robin were more “miserly” when they had to spend cash for the items they used to “whip out plastic” for.
- Ben started bringing his own coffee and snack to work each morning.
- They both had to learn how to launder their own clothing, and buy clothes that didn’t need dry cleaning.
- They had to live without air conditioning and hung out their clothes to dry, instead of using their clothes dryer. They also installed compact florescence, and power strips to rid themselves of “phantom loads.”
- They reduced their food budget by no longer buying all the chemicals they normally used to clean the house, and switched to using only three items: bleach, white vinegar, and all purpose liquid soap. They began to cut their meat servings in half, and by in bulk from a local food co-op. They also stopped buying any ready-made meals, and took more time to cook at home. Next year, they plan to put in a garden.
- They didn’t go away on those yearly romantic get-aways, and instead, sent the boys on “sleep over parties” at friends’ homes, and created the romance right in their own home.
- The boys didn’t go to summer camp for a year. They realized a painful fact: The family hadn’t been able to afford this expense for several years, but using credit cards had help to hide that fact. Joining a local YMCA allowed them to have fun as a family, and Robin and Ben started to get more exercise too. They also had to figure out how to arrange for free or low-cost daycare during that month, and did so by bartering with friends.
- They were now used to setting aside $351.00 a month that used to go to credit card debt. They soon learned that much of it was being eaten up by expenses related to fossil fuel. They continued to function in a cash economy and were glad to have learned the financial skills to get themselves out of debt. They began to apply as much of this “savings” to their mortgage as they were able, and used their new-found financial literacy to plan to reduce their remaining 28 year mortgage to 10-12 years.
Robin and Ben Balinski were affluent upper middle-class Americans, and the task is more difficult for those families forced to live on less. However, the task will be considerably harder, but not impossible for most of us in the Industrialized world. Consider some of these ideas:
- Learn the difference between “necessities,” conveniences” and “other.” Check out your reasoning by asking whether those living in “second” and “third-world countries” would agree.
- Seek additional work (even if it isn’t in “your field”)
- Turn in cellphones.
- Suspend all internet services-use the internet through your local library,instead.
- Suspend all pay television. You won’t be “depriving” your children. You’ll be encouraging them to read, do homework, visit with friends, play outdoors.
- Create deeper cuts to the food budget or seek out food pantries/food stamps.
- Seek public assistance with utility costs.
- Replace kid’s clothes at second-hand stores.
- Downsize one’s home/take in boarders/rent.
- Live without an automobile, drive only one automobile, or use public transportation instead of driving.
- Place beloved pets with others who can financially care for them.
- Stop or cut down drinking alcohol/soda, using recreational drugs or smoking cigarettes.
- If you are in a financial hole, STOP DIGGING. Unless you are in exceptional circumstances, you will NOT have more disposable income tomorrow than you do today. Change your income-to-expense ratio now.
- FORGET TEASER RATES. Although you may save some interest charges by “gaming the system,” with low or no interest rates for some period of time, if you’ve found yourself deeply in credit card debt, you don’t “play the game” well, so stop playing! The game is rigged, and the fine print says “you lose!” in fifty different ways. They can change the rules whenever it suits them. They own the “arbitrators” you’ll appeal to.
- REMOVE ALL CREDIT CARDS FROM YOUR WALLETS. Don’t cut them up, quite yet. Store them in a place that’s hard to reach, and make an agreement with someone else that you’ll check with them before you decide to use them again. If you have a problem overspending, you’ll feel very anxious when the spending stops, as shopping may have been your way of “feeling better” when you were upset. This is a serious problem. Approach it like that, and ask friends to be available to talk to, when you are feeling blue or “in the mood to shop.”
For some of you, these suggestions will be rejected out of hand. For others, you’ve already cut expenses “to the bone,” and will need to find alternative sources of income in order to make a dent in your debt. I will tell each of you one thing I believe very deeply: It will be tougher to do any of this NEXT YEAR than it will be for you to do it now. Friends, “Just do it.”
Credit card companies have done the math and have recognized a fact that might have escaped you: You will be overly optimistic about your capacity to pay back the entire balance before the “teaser” rate ends. When that day comes, you’ll then find yourself with a substantial interest rate. I’ll say it again: the game is rigged. There is no such thing as a “free lunch.”
Face your financial situation today, and instead of playing “musical credit cards,” focus instead on paying them off QUICKLY. If you are in an average amount of credit card debt (about $8600) the credit card companies are counting on the fact that you won’t muster the self-discipline to devote an additional $26.38 a week to paying off your credit cards, and instead will provide them with $29,707.72 in profits over your lifetime.
Prove them wrong.