I've recently received a few questions on the use of credit cards in personal finance. So, here is my quick credit card dating history...
I got my first credit card when I was 17 before I went on a school trip to Spain. I got a secure credit card for $500. This means the bank took $500 from me and put it in a savings account I could not touch. This money could be used if I didn't pay my bill for a few months :) I am happy to say that when I closed this credit card later in life, I was able to take $500 out of one savings account and put it in another. I viewed this card as a safety net. If I got into a problem, I had something to help me out!
In college the credit card spending started to get away from me. I was learning how to use disposable income and when it wasn’t available in the moment, I had a hard time saying no. So I started to accumulate movie tickets, pizzas, and road trips on my credit card. I would use it as a place holder until I got a check from my campus jobs, but it quickly became the go to way of spending money. I was always paying off my activities with the next week’s pay check. This is also about the same time that I stopped putting half my pay check into savings, funny how those coincide.
Most months I would pay it off in full because the charges were small enough, but then I left college and I no longer had a meal plan to pay for my food, or 'CollegeBucks' to take care of going out for late night pizza, or free events to attend every night of the week on campus. I think I slowly fell into using my Credit Card as a safety net for when I didn't have money in the checking account to do what we were going out to do. The definition of an “emergency” became, we don’t have enough money in the account to do what we want to do.
For example, we made plans to go out to dinner with friends. Before going to dinner, I realized we only had $30 to put towards dinner. While I couldn't just cancel our dinner plans, so the answer became, "While I guess we have to use the Credit Card to cover this one." Saving for special event of Christmas were not in our budget.
"Let's put it on the credit card and we can pay it back next month," started to be used almost every single time we went out. We never said NO, we just kept living our life beyond our means. We don't live extravagantly and don't go out to eat every night. We are frugal people by nature, but yet when an opportunity presented itself we rarely said No.
So the credit cards kept on increasing. We maxed out our cards a couple of times, but got lucky. We either had savings, a great tax refund, or a free month of rent on a new apartment. Let's just say someone has been watching over Nick and I because every time the credit cards got to their max level, something would just go right for us.
But 2 months ago, when we began this debt payment process, I realized things weren't always going to work out for us. We kept spending money on activities that we didn't have the money for and waisting money and savings of stupid activities. We had not learned to live within our means. Our Credit cards were at roughly $7,500 and we needed to STOP saying yes and learn to spend ONLY what our incomes would allow.
I would love to say that are credit card debt was for emergencies, but they weren't. They were life. You take a look at our credit card bill and you can see our life. We sold ourselves on using our credit cards because we get cash back, but seriously 1% Cash Back is not worth the interest that we accumulate when we can't pay down our bill each month!!
As I read Dave Ramsey's Total Money Makeover, he made two really good points that have stuck with me and forced me to really think hard about how/when we use our Credit Cards, or if we should even have Credit Cards:
· Many people plan on paying off their credit card balance at the end of each month but very few people actually fulfill this goal. I think he said only 33% of people actually fulfill the goal. Yup, I had been one of those 33%, but had become part of the 67%.
· Long term financial independence and wealth do not revolve around credit cards. The more you think about it the more you realize it’s true. The wealthy are not using 1% cash back or any other rewards program to live life.
These two points helped me to move to NOT using our credit cards. Nick still likes to pay a few bills on his card and pay them off each month, and I still have my gym membership connected to my credit card. I should probably change that account, and will eventually switch that to my debit card. But, neither of us have used the card for life activities for two months. I still carry my card with me, and hope that at some point I will feel comfortable taking it out of my wallet, but for today I am happy to not be swiping the card.
This is not an easy choice to make and has at times we have really hated saying No to attending events or going out for drinks. But, we are learning to prioritize and live within our means rather than our credit card limits. Currently it SUCKS, but on a positive note we have "found" money in the budget to pay down debt so the long term potential ROCKS :)