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Credit Card Debt & How To Get It Under Control

Mo’ Money, Mo’ Problems

About once a week I get emails from FFU Readers who have questions about Credit Card Debt.

Typically their question is something like, “I am carrying a balance of $X,XXX.XX, should I sign up for that new Chase Credit Card that offers a 50,000 Mile Sign On Bonus.”

The answer should be fairly obvious, but my answer of course is NO!

As of March 2013, the average U.S Credit Card Debt is $7,122.

Remember that is only Credit Cards, if you throw in Student Loan Debt, that is another $32,559.

The reason why you should AVOID getting a new Credit Card if you have Credit Card Debt is because the amount you will be paying in Interest and other Fees (Annual Fees, Late Payment Fees, etc), will most likely outweigh any benefits you receive from the Sign Up Bonus!

The Cost Of Credit Card Debt

My most recent Credit Card acquisition was the Hyatt Card which got me 2 free nights at any Hyatt Worldwide. Outside of Annual Fees that haven’t been waived for the first year, I have never paid a single cent to Credit Card companies.

Since I don’t ever carry a Balance, to be honest I never look at the Pricing Terms & Conditions for any of the Credit Cards I sign up for. The APR could be 1000% but since I know I won’t ever be carrying a Balance, it doesn’t really matter. My only concern is the Sign Up Bonus.

Below is the Pricing information for my new Hyatt Card.

The Annual Percentage Rate (APR) for the Hyatt Card is 15.24%

If you are an average American and carry a Credit Card Balance of $7,122 and only paid the Minimum Monthly Payment required by your Credit Card (in this case $162 a month) while NOT charging anything new onto your Card, it would take you 5 years & 7 months to pay off your $7,122 in Debt.

During that time, you would spend around $3,159 on Interest to the Credit Card company.

While those Hyatt 2 Free Night Certificates are valuable, they certainly aren’t that valuable!

Remember, the above Payment Schedule assumes that you have 100% froze your spending and aren’t adding anything new to your Credit Debt, which is obviously unrealistic.

Chart below is from ReadyForZero.com

If 5.5 years sounds too long and you want to get out of debt within 1 year, which is EXTREMELY ambitious, your Monthly Payment would jump from $162 to $717!

On the plus side, instead of paying $3,159 in Interest, you would only pay $557!

The reason I bring all this up is that while most Bloggers push Credit Cards to earn free Miles (myself included), the assumption that we make is that everyone is financially responsible. Unfortunately as the Housing Bubble and subsequent Recession has taught us, that is not always the case…

Banks would not offer such lucrative Sign Up Bonuses for Credit Cards if it wasn’t such a ridiculously profitable business!

People forget but if a Bank if willing to offer you $2,000+ in Free Hotel Nights at Hyatt but you aren’t generating any real Revenue for the Bank (with Fees, Interest, etc), then there has to be another Customer who is covering your part plus more, or the Banks wouldn’t continue to offer Sign Up Bonuses because it wouldn’t be profitable!

While using Credit Cards to earn free Miles is great if you don’t carry a Balance, Credit Card Debt on the other hand is an extremely slippery slope. This is because once you accumulate Debt, paying it back doesn’t happen in a vacuum.

While paying down $7,122 in 1 year via $712 Monthly Payments sounds feasible, it doesn’t account for the fact that people still have everyday Fixed Expenses like Rent, Food, Utilities, etc.

So while you may be paying down your Debt by $712 every month, you might also be adding $400 to it with the purchase of Groceries and other necessities.

Ways To Get Debt Under Control

1. Find Out What You Are Spending On

It is safe to say 99% of Credit Card Debt is self-inflicted. It isn’t from emergency hospital bills or anything like that, instead it is mostly from buying unnecessary or over-priced stuff.

The biggest issue is that most people don’t know what they are spending their money on to begin with.

Even if you don’t have Credit Card Debt, I highly suggest everyone get and use Mint.com.

It is my favorite financial website for sole reason that you can incorporate EVERY single financial account you have into Mint.com.

In literally 1 second, you can check and see what all your Assets are, what all your Debts are, and what your exact Net Worth. It does everything for you!

It also pulls in and archives all your Credit Card Transactions so you can see Monthly Trends.

For example, if I wanted to see how much I spent on Food (Groceries, Restaurants, Bars, Fast Food, etc), over the last 12 months, I can EASILY find that out with Mint!

Before checking Mint.com, I would have just assumed it was around $2,000 – $3,000 a year. Boy was I wrong…

Thankfully some that $7,848.31 is from expensive Group Dinners where I charged the meal on my Card and people paid me back, but without Mint.com, I would have just guessed it was WAY LESS than it actually was!

The point is that once you understand what and where you are spending your money, it should be easier to cut back.

If I had Debt and was looking to cut back, I now know a fairly easy category to cut back on would be Food since I am apparently spending close to $8,000 a year on it!

Similarly if you like to Online Shop and just ASSUME that you only spend $3,000 a year on new clothes and in reality you are spending $13,000, knowing that information can be extremely useful because it shows you exactly where you need to cut back!

2. Get Rid Of Your Credit Card….Kind Of

This may seem kind of obvious but if you have Credit Card Debt, the easiest way to control your finances is to get rid of your Credit Card!

While cutting up your Cards sounds great in theory, the reality is that you might need your Cards for some unforeseen emergency or for a necessity purchase online.

Similarly, putting your Cards in your drawer also sounds like a great idea but the temptation to use them is always there.

The best idea I have come across is to give your Credit Cards to a trusted friend or family member (who you know won’t use it!). This way if you need your Cards for a REAL emergency, they are still in one piece. However if you want your Cards to make an impulse purchase that you don’t need, hopefully the embarrassment of having to ask for your Credit Cards back is enough of a deterrent.

The purpose of getting rid of your Credit Cards is that it forces you to switch to all cash, which means you can’t buy things you don’t have enough cash for.

Some people say that they spend more when they pay in cash, but studies show that most people spend more money on Credit Cards because it is hard to visualize how much you are spending.

Regardless if you spend $1 on your Credit Card or $1,000 on your Credit Card, to pay for it, you are still only giving over your Credit Card.

However compared to spending $1 or $1,000 in cash, it is hard not to notice when you have to physically fork over fifty $20 dollar bills to the Cashier!

Additionally by going to the ATM every time you need money and seeing your dwindling balance, it is a far better reminder of your current fiscal situation, as compared to getting a monthly Credit Card Bill of money you have already spent.

3. Use Online Tools To Create A Real Plan

Contrary to what you may see on TV, Credit Card debt does not magically go away, regardless of how of loudly you declare bankruptcy!

While your Credit Card Statement (thanks to Government regulation), now show what happens if you only make Minimum Payments, etc. Your Statement only comes once a month and is not exactly adaptable to your financial situation since it is physically printed on a piece of paper.

Therefore if you have Credit Card Debt, the best bet after getting Mint.com and putting your Cards in “escrow”, is to construct a REALISTIC plan of how to tackle your debt.

Without having a concrete plan, you are more than likely going to continue adding onto your existing Debt.

Thankfully there are tons of free sites like ReadyForZero.com, that specialize in helping people create plans of how to get out of all types of Debt (Credit Card, Student Loans, etc.). The site even shows things like how much Daily Interest you are accumulating on each of your Accounts!

In an era before the Internet, I can understand how people could have trouble managing their Debt, but these day’s there are entire Websites and Blogs focused on helping people get out of Debt for FREE!

Recap

While talking about Credit Card Debt isn’t exactly a fun topic to write about, it is extremely important since most of the Miles we earn are via Credit Cards.

Overall, “Credit” can be a great thing when it is used to finance large purchases like Education or a House. In those cases, it makes sense to take on Debt because you would not be able to pay for those purchases in cash. In terms of Housing, your Mortgage Payment actually turns into Equity which you can sell later.

However for everyday items like Clothes, Electronics, etc, you should never purchase any of those items on Credit because you are lacking the funds to pay for them in Cash.

I purchase everything on my Credit Card, but it is solely because I want to earn Miles. If for some reason Credit Card Companies stopped offering Miles or started charging a Monthly Fee to use a Credit Card, I would get rid of my Credit Card and have no problem making all the same purchases in Cash.

While only paying the Minimum Payment on your Credit Card for 1 month isn’t the end of the World, it easily can turn into a snowball and become a reoccurring monthly issue.

The bottom line is that if you have Credit Card Debt, your number one priority should be to pay that debt off and not sign up for any new Cards!

Regardless of how good the Credit Card Sign Up Bonus is, there will always be others! Remember if you have Debt, more than likely, you will pay far more in Interest and Fees than the Sign Up Bonus on the new Card is worth!

If you have any Debt related questions, feel free to email me or leave me a comment below!

-Parag

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3 Comments

  • Vandy says:

    Awesome video! "I didn't say it, I declared it."

  • jeff says:

    you gave out bad info on the Hyatt free nights for the credit card. they are not transferable. thus, if a persons parents get 2 cards with 4 nights they cannot give them to their adult kids, unless, they show up at the hotel themselves and register the room in their own name. kind of ruins a honeymoon.

  • Frequent Flyer University says:

    @Jeff – I never said to transfer them. You can book under your name, and then add them as a guest. I do it all the time.

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