Credit Card Debt - how to free yourself

As amazing as it seems, most people do not understand credit card debt. They see a refrigerator and they think – oh, it’s only $10 a month for the refrigerator. We can afford that can’t we? They don’t think in terms of how much money is on their credit cards as a total amount. They just see it as another sum of money they will have to come up with each month, and while $10 a month more may sound reasonable and doable, that $10 a month, added to what they already owe, may tally into the thousands of dollars.

What they also may not understand, is that $10 a month is going towards a $700 refrigerator – by the time it’s paid off, they would have been able to buy 3 refrigerators for all the finance charges they had to pay over the years.

I know a woman who only bought merchandise that was on sale – whether she needed it or not – if it was on sale, she bought it. She had a closet full of clothing that she had bought over the years, most of which she had never worn, but they were all on sale so she bought them. And with each blouse or dress, she added to her collection in the closet, I kept hearing her tell me about the wonderful bargain she had got and how much money she had saved. These articles of clothing stayed in her closet unworn for years at a time- while she stuck to just a few outfits that felt comfortable on her. She was struggling to pay her bills – I said to her – stop shopping – and she said: that’s the only thing my husband and I enjoy doing together.

I told her that she and her husband needed to develop another hobby. They did. They started eating. Gargantuan amounts of food so she couldn’t even get into any of her bargain clothing. This went on for several years. When she lost her job and couldn’t find employment, I started to counsel her on her spending habits. I wanted to know what she needed at a bare minimum to survive. Part of me was afraid to ask her how much her credit card debt amounted to – but I did anyway. When she told me she had racked up $50000, it took everything in me not to let out a loud gasp in shock. I then proceeded to give her financial counselling for many years after that – and now I’m pleased to say that she’s free of credit card debt and she even has $4000 in her savings account.

Credit cards are very seductive. When they first came into existence, people used them for the purpose for which they were intended – as emergency funds. Your car breaks down, you have no cash, no savings, nothing that you could use to pay the towtruck to come and rescue you for the repairs that are needed at a service station, so you whipped out your trusty little credit card that was on hand just for an emergency, and you breathed a sigh of relief when they put on a new fan belt or a new radiator or a new tyre to replace the one that had just blown – and that’s what credit cards were supposed to be used for.

But over the years, people have become very irresponsible with their finances. These credit cards are no longer being used just for emergencies by most people. They are being used for a better way of life, a higher standard of living, expensive purchases that they don’t really need. And the credit card debt just keeps going up and up and up – and they pay no attention to it as long as they can make their payments.

When they are laid off from their job or fired, and their income goes out of the window, they suddenly become aware of payments that they cannot meet. And still it doesn’t occur to them that they have become credit card junkies. When they are facing bankruptcy and they have to go for consumer counselling and all their credit cards are taken away from them, while the credit card counsellor negotiates with the credit card companies for manageable payments, it’s like having withdrawal symptoms. And never underestimate the fact that they are not only having financial withdrawal symptoms but emotional ones as well. Because now, they cannot see a way of life that doesn’t feel hopeless.

To illustrate this point, during the Cuban missile crisis of October 1962, the people in Miami, Florida, were only 90 miles away from Cuba when the threat of being bombed and blown out of existence became a very real possibility. Emotions ran high, people panicked and the main attitude of the residents was – if I’m going to die, I might as well enjoy my last few days. They rushed to the stores in droves. They charged all kinds of luxury items on their credit cards because they never really expected to have to pay them off. After all, if they were going to be bombed, they wouldn’t have to pay the consequences, so they might as well enjoy themselves. They bought television sets, they bought boats, they bought cars. They bought all the things that they never could have afforded if they lived to be over 100.

The Cuban crisis was averted. Miami stayed intact, people went on with their lives – except one vast difference –now they had credit card debt up to their eyeballs. They had big ticket items that they couldn’t afford and wouldn’t be able to use. They had small ticket items too, but a great many of them - again with purchases that were totally unnecessary, extravagant and way beyond their budget.

The economy of that state was in great jeopardy. People’s homes were foreclosed, their cars and their boats were repossessed and people were out on the street. Businesses went under when their customers couldn’t afford to pay their debts.

Now if we look at what took place in 1962, a little under 40 years ago, and we multiply it by many millions of dollars more, we get to see the beginnings of what would eventually affect a global economy.

To summarise:
- be aware that your minimum monthly payment may seem to be a small amount, but you are paying several times over the original purchase price for your goods
- learn to use your credit cards only for emergencies and nothing else
- don’t incur any more debt than you already have

Let’s take a look at how our global economy got to be in such a mess. As we discussed with the Cuban Missile Crisis in 1962, we saw that what started with one small state in the US, became a temptation of easy living with no responsibility for paying off those debts. This is something that is felt around the world. I doubt if there is a country in the world now that doesn’t have its fair share of problems with people who are tempted to go into debt for luxuries that they cannot afford. We have only to look at the banking institutions, the financial institutions, with people who have got mortgages for nothing down, or 5% or 10% down, who would not have qualified as creditworthy if the banks had really vetted these people properly.

Now let’s look at cash advances. Again this is something that credit card companies have made too easy for its users. If it’s used appropriately for emergencies and nothing else, consumers might be better able to pay off these debts. Unfortunately, many people look at a cash advance differently. They ignore the fact that their finance charges start the minute they make that cash advance and that interest keeps accruing every single day from the first day of that loan. If they bothered to do the maths, they would have the option of seeing whether or not taking that cash advance was really of benefit to them.

More often than not, these cash advances are not paid off quickly, but they just get added into their ongoing credit card debt. Not enough people look at their statement each month to see how much money is going towards their cash advance and how much money is going towards their monthly charge –and those rates differ greatly.

Now let’s take a look at balance transfers. The average consumer sees a balance transfer as an quick way to pay off their credit cards, perhaps by combining all their payments into one, two or three payments instead of maybe ten payments. And if it were that simple, perhaps their credit card debt would be more manageable. But let’s look at some of the seductive ways that banks have of tempting you to do these balance transfers. During the good times, banks will offer a 0% finance charge for a certain number of months and then a higher charge for the remainder of the loan – and if you just looked at that, it might seem reasonable. But money has a way of making you greedy – so you may not look too closely at the fact that you may be paying $90 or $120 for every transaction you make on this balance transfer. Let’s say you want to pay off four of your credit cards: and you are going to transfer them onto this one credit card so that you have only one payment a month. For each of those four cards that you are transferring balances from to this one card, you will have to pay a fee of at least $90.00 per transaction. So you will be paying an extra $360 just for transferring the monies on these four cards. So you may be getting 0% financing for 6 months, however, and this is a big however, in smaller print, banks are telling you that they have the right to change that balance transfer offer as they see fit. So now you are thinking you are going in at 0% for the next 6 months and 9% after that until the balance is paid off. Now a few months later, you get your statement in the mail, if you look closely enough, you may be very surprised to see your interest rate go from 9% to 13.9% - because your bank can and often does change the original offer.

Here’s another eye-opener. You call your bank and you want to know what the payoff amount is, because now you have enough money to pay off the balance. You ask them to figure out the finance charges and add it to what you are supposed to be paying – and you think to yourself when you make that payment that you are finished with it. Not so fast. Your next statement comes in and lo and behold, there are more finance charges that have been accrued that you still owe.

So it’s very easy to see how credit card debt starts and how it escalates and how hopeless it seems for a lot of individuals.

And if you are one of the many consumers who looks at your statement and says – oh I just have to pay $15 – that’s the minimum amount due and then ignore the larger balance of everything that’s due, then you are one of those people who are just paying down the interest on the loan and not a penny off the principal of the loan.