My Debt-Reduction “Ah-ha” Moment

If all goes well, I’ll be paying off the last of my credit card debt in two more weeks.  Like lots of people who started college in the ’90s, I got my first card for the infamous “free t-shirt.”  Now, fourteen years later, I’m finally going to stop carrying a balance on my cards!  It’s a really great feeling to have my spending under control after all these years.

I tell my writing students to start with a topic and let it stew for a few days.  If they’re extraverts, talking it out with a few people may help them generate ideas.  Or, if they’re introverts, like me, just letting it process in the back of their minds is best.  I often joke that I do my best thinking in the shower.  I also come up with ideas while on walks or hikes.  Today was no different.  While mulling over debt-reduction in the shower this morning, I realized that I finally “get” why carrying debt on credit cards is such a bad idea.

Credit card maximums are not, and should never be, part of your budget.

As I’ve discussed before, for years I casually treated my cards as a cushion for my budget.  “Sure,” I’d think, “the paperback or dinner out or vacation may not be in my budget, but I’ve still got $3,000 left on my credit card.”  Logically, I knew that the credit-card line was not cash in hand, but emotionally, especially when I wanted something, that amount sure looked like just one more innocent line on my budget.  I’ve even been known to think, “hey, carrying a balance of a thousand or two isn’t so awful.  Look how low my payments are, and I get to have this cool stuff.”

So, now that I’ve lived for six months WITHOUT that kind of logic floating me along, I’ve learned a valuable lesson.  Let’s say that I have an annual budget of $32,400 (which I do).  I actually earn more than that, but after taxes, my 401(k) reduction, and insurance, this is what I have to play with.  Now, what if I treat my credit card maximum of $15,000 as part of my budget, bringing my annual budget to $47,400?  What happens?  Well, for that one year, life is great: dinners out, movies, theater tickets, weekend getaways, shiny new hardback books, and designer clothes.  Perhaps I charge $8,000 (which I did the year I first moved to Ohio).  Hey, I haven’t even maxed out my credit cards; there’s still $7,000 left!

However, since the money that I’ve spent is not real money that I have earned, the next year my budget shrinks.  I’ll have less than $47,400 because I’ve eaten up some of my credit line and every month, I’ll have to pay the minimums plus interest.  For me, that was a hefty 16% to 20%; my payments totalled around $200 to $300 a month.  Now, my actual budget will be something like $28,800 after credit card payments, and I’ll only have around $6,000 left before I max out my cards (thanks to interest).  But, since my brain doesn’t want to believe that I’ve taken the equivalent of a pay cut, and the credit card companies LOVE me and will probably increase my credit line, I’ll probably charge another $8,000.  I’ll be getting less stuff, feeling grumpy, and probably charging as much as I can to cheer myself up.  After two years, I’ll have $16,000 in debt, a smaller annual budget, and some serious anxiety.  Even if I get a raise over those years, it won’t offset my credit-card payments.  As an academic, we usually get barely over cost of living, around 4% to 5%.

Now, comes the even more gruesome part.  Suddenly, I’ve got $16,000 in debt, and need to earn over $20,000 to pay that off.  Remember, what I earn also gets eaten up by taxes, retirement, and insurance, so I now have to earn more to pay off that fake budget line.  For that one year where I had a fake budget thanks to the credit cards, I now would need three or four years to take a cut in my standard of living to pay it all off.

Fortunately, I came to my senses before things got too bad, but you can see how easily it all happens.  The minute you treat that credit line like it’s “real” money is the minute you are suddenly on a very slippery slope.  It’s sustainable for a year or two, perhaps even four or five, but it will quickly get very ugly.  The only way I was able to do it for so many years was because of a steady infusion of student loans.  Of course, taking on more debt to pay off the old debt is about the worst thing you can do!

Next week, I’ll share my new approach to my budget; I think it will lead to a much healthier financial life.  While debt-reduction was difficult, I now plan to stick with my new frugal lifestyle to build up savings.  So long credit-card maximums, hello real money in the bank!

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2 responses to “My Debt-Reduction “Ah-ha” Moment

  1. Pingback: Carnival of Debt Reduction » Blog Archive » Welcome to the Carnival of Debt Reduction

  2. Pingback: The Beauty of Savings « My Daily Dollars

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