What’s wrong with a little bit of credit card debt?
During last week’s KOAB Budgeting Webinar, I was asked this question and honestly, it caught me off guard.
I did my best to answer, but I have been reflecting ever since on the question and my surprised reaction to it.
After the uphill road we trudged to get out of credit card debt, I will never again carry a balance on my card.
It’s just not an option.
And here’s why:
Debt, in any form, represents risk.
And I have become a risk averse person. Some degree of risk is acceptable when it comes to our investments. But that’s investing money we don’t need TODAY.
When you owe someone money – anyone, but especially credit card companies with their outrageous interest rates and punitive fees – you are hedging your current income to cover your past spending behavior.
There is an internal dialogue (and some are so used to this dialogue, that they probably don’t even hear it anymore.). It goes something like this, “I want/need this item today, but I don’t have the money to pay for it today. I will BORROW MONEY from the credit card company and pay them back next month/over several months when I will have the money to pay for it.”
But what happens if you don’t have the money?
What happens if you suddenly lose your job? Or your salary is cut due to austerity measures? Or your car dies and the money you were going to put toward paying for the item you charged last month now has to go to unexpected car repairs?
If your current income or expenses change for any reason, you can no longer make good on that commitment.
(The same “debt = risk” statement could be said about one’s home mortgage. And in fact, if there was anyway whatsoever that we could have paid cash for a house, we would have. However, we just didn’t have that kind of a savings account. So we put down as much as we possibly could (well over the typical 20%) and bought less house than we could have afforded according to any financial calculator out there.)
Carrying a credit card balance means paying in the future for purchases from your past.
When we decided to get out of debt, the biggest challenge wasn’t changing our lifestyle. It was changing our mindset.
We had very much adopted the mainstream cultural mindset that there is absolutely nothing wrong with buying something you can’t afford.
And by afford I mean “have the money in your bank right this moment to pay cash for something”.
If our old oven “died” and we needed a new oven, we just put it on a card and paid it off over several months.
As soon as we did that, the oven became a tangible manifestation of our risk (see above).
We were leveraging our current and future security to pay off a purchase we’d made in the past.
Once we determined to get out of debt, we had to embrace a new mindset in which this kind of behavior was no longer acceptable.
So today, we save for several months to buy a new oven, and head to the store with cash in hand (or at least in the bank).
And if we don’t have cash in hand, and we don’t have an emergency fund, then we wait. We use the microwave or stove-top. We ask our friends to borrow their oven to bake our challah. We improvise and get by.
But we don’t buy that oven until we have cash to pay for it.
Credit cards lull you into thinking you have more money than you really do.
I remember getting my first credit card after college. They gave me a $5,500 line of credit. I was single, living in Washington DC and making $24,000 a year. I thought I’d hit the jackpot. $5,500 was more than twice what I made in a month.
Suddenly I felt flush: “I have $5,500!!!!” I thought.
It took me twelve years to get how wrong I was.
I didn’t have $5,500. I had squat.
The credit card company had $5,500. And if I had spent THEIR $5,500 (which I did — and then some — because the companies kept giving me more cards with higher limits), I’d have less than squat.
Because I’d have to pay them all that interest.
Credit card debt means stress. No credit card debt means peace.
Today, when I buy some item or pay for some service, I have peace of mind. Because I’m paying for it with money we already have.
I didn’t realize for a long time how much the constant borrowing cycle was eroding my peace of mind. I just knew our debt was growing.
At first it grew slowly, but then it picked up steam. Like a runaway truck careening off the side of a steep, steep cliff.
We had “diversified” our debt, over several cards and a few personal loans, falsely thinking this was the way to mitigate the risk of debt.
But instead we were just digging our hole wider – and deeper.
As went the hole so went my anxiety.
I’d swipe the cards to buy stuff and feel good – for a minute. (There’s a reason it’s called “Retail Therapy”.)
But then I’ feel bad: Guilty, ashamed, embarrassed, worried. Because I knew that each swipe of the card was deepening and widening that hole.
And there wasn’t a shovel in sight. Some days, I was certain I’d be buried in that hole we’d dug.
Today we probably buy less than we once did, but when we do make a purchase, we have peace. Because there is no hole.
I don’t think people who have credit card debt are “evil”. G-d forbid. But I do think that there is no such thing as “just a little bit of debt”. Little bits grow. Wider and deeper and faster.
For some the consequences are “merely” financial.
But for many, there are personal, emotional, health, and even marital consequences.
If you find yourself suffering those consequences — or if you can see a glimmer of them in your future — I would strongly encourage you to take stock.
You don’t have to keep doing what you’ve been doing, just because it seems like everybody else is doing it.
You can say, “Enough is enough. I’m going to change things. Right now. Because my health, my mental state, my marriage and certainly my family’s financial future are WORTH it!”