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.
NO!
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?
Great blog. Thank you!!
So true. We are in the process of whittling down our debt and it is gratifying to be able to pay cash. But what do you for something that is a real ‘need’ as opposed to a ‘want’? For example, my fridge needs repairs that I am holding off on until I have enough cash . I the meantime, by holding off I run the risk of needing an even bigger repair or maybe even having to replace it altogether. Do I use emergency cash? (Hate to do that , because its still a woefully low amount). Am I being penny wise pound foolish? Overall our budgeting has reduced our stress tremendously but not entirely…
Baila – It sounds like you are in the “in between” zone. You are still paying off debt, so only have the baby emergency fund. Can you cash-flow the repairs by either cutting back on something else in the budget this month or, as a second choice, slowing your debt snowball for the month?
A fridge is the most basic kitchen appliance – I think you can get by without an oven. I don’t know if you can get by without a fridge, especially with children!
I’d get at least two quotes on the repairs, since these pennies matter and you don’t want to waste them. Then if it was me, I’d probably do whatever I could to pay for the repairs without touching the baby emergency fund. If you have to tap that emergency cash, then priority #1 is refilling it. (I also liked to use situations like this to look around my house and say, “What can I sell on Craigslist???”)
What is your take on other loans- like college loans, or once you’re done with college and have higher education loans (masters, doctorate)?
Melissa,
Judging from Mara’s original posts when she started the blog, I would presume that she would say to pay those off in the order of size.
If you’re someone who has no interest in carrying a credit card balance and can handle being in long-term debt at low interest rates (which mortgage loans and student loans generally are), I would pay them off based on the traditional view of paying off debt in the order of highest interest rate to lowest interest rate. The other thing to consider with debts like student loans some or all of the interest payments are tax deductible (depending on your income level). Student loans are deductable regardless of whether you itemize, vs. mortgage loans which are really only deductible over the amount of your standard deduiction. So, you’re getting an additional savings on your interest rate. Include the tax savings and deduct the savings from your interest rate to get your effective interest rate on those loans. If you can invest at higher rates of return thanyour effective interest rates, I would say to save the money from paying extra into student loans and invest instead. If your student interest rate is high (like 6%+), then try to pay it off early.
Great post. Change of attitude or perspective is the most important aspect in addressing spending habits and credit card debt. From my experience, the shift is the hardest thing to change. Your explanation is one of the best I have read.
this was a. well written article. Did you read Total Money Makeover by Dave Ramsey? Your approach sounds very similar to his. A friend let me borrow it and we have stopped using credit cards. I have used all my saving bonds from when I was a kid to pay off most of our debt, we created a budget and feel like we can breath. It’s a great book to help you get started if you feel like you are sinking in debt and don’t know where to begin.
Having credit cards tied to frequent flier airline miles is great. It’s the only way we can afford to go on family vacations. After 2 children in day school and after child care and mortgage payments, there’s nothing left for vacations. We pay our credit cards off in full at the end of every single month, and then save up those precious points for airline tickets and hotel rooms. In the past 2 years, we’ve gone to Argentina, Florida, and we’re heading to Texas from the northeast, all on airline miles. The $100 per credit card per year fee is well worth it. I pay for nothing in cash. Even the $0.14 I paid in sales tax to get my free bottle of CVS body wash today went on the credit card. If you’re disciplined and can pay off the balance every month, using these types of credit cards is a great extra.