The magical creation of credit card debt
Ahhh credit cards. They are simple, seductive, and laden with hidden dangers.
The average American family is $15,310 in credit card debt (according to Nerdwallet). That’s not anything you haven’t heard before. But what I’m going to show you is how that happened. That’s the great mystery. Even to the people with the credit card debt, or maybe to them most of all. Let’s explore.
You see, I have noticed a reoccurring pattern. Every one of my clients, past and present, that has credit card debt is truly mystified. “I have no idea how the balance got so high,” they all say. The debt seems to have magically grown to uncomfortable and stressful proportions.
How did it happen? It happened because your mind told you a lie, a lie that looked like the truth. Here it is. The freedom-killing, debt-creating thought. See if it resonates.
“I have to get _______. I’m a little short on cash, but I get paid on Friday. I’ll put it on my credit card and when the bill comes I will pay it in full. Tout suite!” Now let’s see why this thought wreaks so much havoc on your finances.
Imagine you earn $4,000 a month and you put $1,000 on the credit card, bringing your total monthly spending to $5,000. In order for you to pay the bill in full when it comes, the following month you can only spend $3,000 (the other $1,000 goes to paying off the credit card).
In month one you spent 125% of your income. In order to pay your credit card off, in month two, you would have to spend 75% of your income. That’s a 50% reduction in your spending! To put it even more simply, it would be like having to reduce your spending by an entire paycheck. Do you see how unlikely that is?
But, month one and month two isn’t what makes the credit card debt grow to unbearable proportions. It’s simply the genesis of how the debt was created. To make it grow to it’s current size you had to do one more thing: Keep using the credit card. This compounds the situation, making the debt grow like wildfire.
Let me show you. Continuing with example above, in month one you earned $4,000 and you put $1,000 on the credit card. You vowed to pay it off by month’s end but something unexpected happened, causing you to not be able to pay the credit card bill in full. So, you pay $200. And vow to pay the rest off at the end of the next cycle. However, because you feel tight on cash, you have been using your credit card for small purchases throughout the month. By the end of the month you have $500 in new charges, not adding in interest. Your new credit card debt is: $1,300 (month 1 = $1,000 – $200 payment + $500 new charges =$1,300).
Now in order to have this card paid in full by month’s end, you have to spend 67% of your income. To put it another way, it would be like saving $1,300 of your monthly income, when the month before you were creating debt.
So what’s the solution? If you have credit card debt, the answer is really simple. Don’t use your credit card! Not for a plane ticket, not for anything. If you think your credit cards keep you safe or that they earn you free stuff, Read this. Those are the two biggest myths put into your head by the credit card companies!
It would be like a denture company saying candy is good for your teeth. Would you believe them? No. But that’s because having dentures is not sexy. Having everything you want now is super sexy. That’s why it’s so easy to fall prey to the propaganda, because you want to believe it.
So, I’m going to tell you some truths that make not using your credit card super sexy. Imagine never, ever having credit card debt. Imagine all those monthly payments that you used to have to send to the credit card can be spent on a family adventure. A new outfit. Spanish class. Every single month you will have hundreds of dollars that you can do anything you want with, without feeling guilty! It’s like eating hot fudge sundaes all day long and not gaining a pound. This freedom can be yours. Just stop using your credit card. (It won’t ruin your credit! )