Think Convenience Card, Not Credit Card
Posted on June 22, 2007
When you swipe that credit card through the card reader, what are your thoughts? Are you thinking, “Can I afford this purchase?” or are you thinking, “Can I make the minimum payment?” That first thought will keep you out of trouble; the second will almost guarantee you’ll soon be in trouble. Credit cards have made it so easy for people to make purchases they can’t really afford that today the average person is carrying over $9,000 worth of credit card debt. Not only are people buying things before they can afford them, but they’re also paying interest rates that not many years ago would have been considered usurious.
A few months ago, I agreed to help a relative who was struggling with debts that were spiraling out of control. The first thing I did was to get copies of all credit card bills for an entire month and list them on a spreadsheet. That way we could evaluate the problem. This individual was paying on nine credit cards with balances totaling nearly $26,000. The interest rates on the accounts ranged from 14.24% to 24.99%. The interest alone for a single month was over $360.00. This person’s take home pay averaged about $15.00 per hour, which meant it took 24 hours of his pay just to cover the interest. That’s over a half a week!
Like most people with excessive consumer debt, when asked what he had to show for all this debt, he could come up with practically nothing. That’s why it called consumer debt�because you consume most of what you go in debt to buy. Not a pleasant thought is it? We added up the payments, and discovered that it took more than an entire weeks pay to cover just the minimum amount due. He was well into his second week of work each month before he started earning money that was not already committed to pay for past excesses. Looking at it another way, he had to choose between adjusting his lifestyle to live on less than three weeks pay per month or go deeper in debt.
This is why credit card debt is so destructive. Whenever you charge something you can’t pay off at the end of the month, it lowers your standard of living the next month and every month thereafter until it is paid. If he paid just the minimum payments each month, it would take this individual over ten years to get out of debt, providing he didn’t borrow any more. If he paid more than the minimum payments he would have to reduce his standard of living even greater, albeit for a shorter period of time.
Once he saw in black and white what a mess he had gotten himself in, my relative made a commitment to take some extreme measures to get out of debt and let his past indiscretions be a learning experience he won’t repeat. I helped him establish a plan to pay off the highest interest debts first, transfer and consolidate balances to reduce the interest on the remaining debt and today I’m please to report that the course he is on will have him out of debt by year-end. With the debt gone, the several hundred extra dollars he will have each month will allow him to enjoy a better life without going in debt.
This example allowed me to see, first hand, how easily overspending, just a few dollars each month, could accumulate into thousands of dollars of debt and how this could deprive a person of the standard of living to which he should be entitled. The extreme measures my relative had to take to get out of debt included practically living like a pauper, scraping by on minimal expenses and having to pick up extra work to be able to have any pleasures. Granted, he chose this radical approach, rather than taking years to pay off his debts, but the message it delivered was loud and clear, “Credit card debt lowers your standard of living every month until it is paid.”
Here’s a tip! When you use your cards as convenience cards rather than credit cards, they can be wonderful money management tools. I charge nearly everything I purchase to my credit cards. I mainly use two cards, one for business related purchases and one for personal expenses. Throughout the month I keep good records of what I have charged and I never put more on the cards than what I can pay off at the end of the month. This provides me with several conveniences. I don’t have to carry a checkbook or a lot of cash. It allows me to dispute charges in the event products are defective or merchants are dishonest. The receipts aid me in keeping a record of what I have spent. But for me, the biggest convenience is that I only have to write a couple of checks each month, instead of several dozen.
I believe most people get in trouble with credit cards for two reasons. One, they don’t keep good records of what they are charging throughout the month and are often surprised when the statement arrives. Two, they run a little short of cash and decide to make the minimum payment instead of paying the account in full. If you want to improve you finances, think convenience card, not credit card.
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