What’s so bad about a little credit card debt?
A reader recently asked me this question and when I started to respond to his email, I realized I had a lot to say on the topic!
I know that many people think “a little bit” of debt is no big deal, but I’m personally opposed to carrying any credit card debt — especially consumer debt — and here are the four reasons why:
#1. Debt, in any form, represents risk.
I readily admit it — 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.
Before we got out of debt, I used to have an internal dialogue every time I’d swipe my credit card. It went something like this, “I need (or want) this item today, but I don’t have the money to pay for it today. I will just pay with my credit card now, and then just cover it next month/over the next several months when I have more money.”
With all this rationalizing, what I wasn’t admitting to myself was that I wasn’t “paying” with my credit card — I was borrowing money from my credit card.
And my plan to pay them back the next month was fraught with risk. If you have credit card debt, this “charge now, pay tomorrow” cycle is probably familiar.
But what happens if you suddenly lose your job? Or, less dramatically, if your car battery dies and the money you were planning to put toward paying for the item you charged last month now has to go to covering unexpected car repairs?
If your current income or expenses change for any reason, you will no longer be able to make good on that commitment. That’s how a little credit card debt can quickly spiral out of control.
#2. 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”.
When 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 decided 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.
#3. 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.
#4. Credit card debt can be soul crushing.
A friend was recently talking to me about the credit card debt his family has racked up since sending five kids to day school. The high cost of tuition had them turning to their credit cards to cover basic living expenses, and that debt was mounting at an alarming rate.
“It’s soul crushing,” he lamented.
And I knew just what he meant. It took me a long time to realize that my constant borrowing cycle was eroding my peace of mind. I just knew our debt was growing.
At first it grew slowly, but then — after a back-to-back busted car engine and a kaput oven — our debt picked up steam. Like a runaway truck careening off the side of a steep cliff.
We “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 debt 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 almost immediately, I’d feel bad: Guilty, ashamed, embarrassed, worried. Because I knew that each swipe of the card was digging that hole deeper and wider.
And there wasn’t a shovel in sight. Some days, I was certain I’d be buried alive in that hole we’d dug.
Today we 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 bad people. 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. My friend called the debt “soul crushing” for a reason.
At least that’s what I think. But I’d love to hear your take on things. Is any amount of credit card debt acceptable in your opinion?