This is Part 2 of our Stop Living Paycheck to Paycheck series. You can find all of the previous posts in this series HERE.
Written by Mr. Crumbs
Here’s an excerpt from one of the pre-marital conversations Mrs. Crumbs and I had while driving in the car:
Me: My Visa has a balance of about $8,000… you?
Mrs. Crumbs: I have a balance on an old Discover card just over $10,000, plus a MasterCard with about $3,000 on it.
After this conversation, I’d pretty much labeled credit cards the devil and wanted nothing more than for them to disappear.
If you’ve got a few minutes, feel free to read more about the mounds of debt we faced at the start of our marriage HERE.
Before you can budget for anything, you have to track your expenses. We talked about that HERE, and help you get started.
With your expenses tracked and knowing what you spend monthly (in each of your budget categories), let’s move on to credit cards.
One of the biggest financial hurdles we had to overcome while deeply in debt was our credit card balances and usage.
These balances didn’t include personal loans, car loans, student loans, etc. Yup, we had many more skeletons in the closet (which if you stick around, you’ll get to see unfold over the course of the year).
Online sources estimate that the average U.S. household has about $15,000 in credit card debt.
Credit cards are a double edged sword. They make life incredibly convenient. But because you swipe a card, instead of paying with cold cash, it’s easy to forget that you have to pay back the amount you spend.
How many times have you heard this saying:
“Oh, I’ll just put in on my card” or… “just use your plastic.”
I would even go as far to say as credit cards can be like gambling in a casino. (Please note, I’m not saying using a credit card is gambling. I’m just drawing a parallel to illustrate a point.)
Notice how in casino’s, you gamble with chips, not cash. While casino’s use chips as an added layer of security (to detect fraud) and to collect data on the players (some casino’s use RFID enabled chips), they also encourage you to spend more of your hard earned cash… without knowing it.
By getting a player to redeem his cash for chips, there is a psychological separation between the gambler and his money. Chips are also convenient. No longer do you have to fumble with your wallet, and pull out bills – just reach into your pocket and throw a few chips on the table. It’s easy for gamblers to forget that when they make a bet, it actually affects their bank account!
Just in case I wasn’t clear, my point is that credit cards can act like chips in a casino.
They can behave as a barrier between the spender and his/her bank account. It’s easy to forget that you have to pay that balance back at the end of the month. If you don’t, there are consequences: interest, fees, debt collectors, poor credit score, etc.
Paying off Your Credit Cards, and Why You Need to Do It
Let me ask you a question. How is the interest rate calculated on your credit card?
Monthly, annually, daily?
Did you know that some credit card agreements allow the credit card company to charge you interest on the full purchase price of an item, even when you’ve paid most of it off?
Do you fully understand the terms of your credit card agreement? My guess is that most of us are in the gray about some of the terms on our credit card.
Which is exactly why you need to pay off your credit cards!!
If you want to learn more about interest, HERE is a great article that explains it well.
We originally had three credit cards with significant balances (note the above conversation). Neither one of us had any real experience in living debt-free, we just knew we didn’t want to spend our lives paying back the bank. So we chose to bite the bullet and take the credit cards by the horns.
Here is how we paid off our credit cards:
(1) Set aside a fixed amount of money (each month), to pay towards your credit cards.
When you’re already living paycheck to paycheck, it might be hard to magically come up with extra money to put towards credit cards. BUT, if you created the initial household budget, you’ll see where your money is going each month.
And you’re likely trying hard to trim a little bit off with each passing week.
That’s the key to drumming up extra money: Reducing the expenses in other areas.
Here are a few ways we “found” income in our budget:
- Sold our two brand new cars and traded them in for fuel efficient, used models. This eliminated an entire car payment.
- Set a limit to dining out to just $20/week.
- Combined cell phone plans and reduced the minutes to the lowest available.
- Set a limit to the number of times we could fill up the gas tank.
After all the cost trimming, we were able to pay $1,000 each month towards our credit cards. Anything extra went into savings, or towards other related debts.
(2) Pay the credit card with the smallest balance first.
Once you have set money aside to use towards your credit cards, attack the balances. We started by choosing the card with the smallest balance, which allowed us to immediately see progress. The remaining cards we paid the minimum payments due.
We do understand that the smartest option may have been to choose the credit card with the highest interest rate, but this is what worked for us.
(3) Reward yourself.
Just because you pay off a card doesn’t mean you can go out and jack up the balance again. Whenever we would pay off a card, we would go on a date night to a local Mexican restaurant (in Texas), where we could eat for $12 (truth).
(4) Start saving.
Because of our credit card negligence, we had been living paycheck to paycheck.
Once we started paying off our cards, we finally started seeing “extra” money in our budget and moved it to our saving account each month. This helped us build an emergency fund.
Credit Cards Can Be Good
It took several years, but once we got our finances and credit card usage under control, we are now able to responsibly use them. In fact, we rarely use cash anymore… here’s why:
(1) We track ALL of our spending.
In fact, we still sit down once a week to discuss what’s been spent, and for what purpose. We know every penny that goes on our cards.
(2) We pay our cards off every month.
By paying off your cards each month, no longer do you have to worry about unexpected interest, fees, finance charges, or debt collectors!
(3) There’s incentives!
We have two credit cards. One American Express that is used all Costco purchases, and one MasterCard that is used to earn airline miles. Because of the incentives offered on these cards, we have been able to fully fund Christmases and travel expenses.
So… credit cards can be bad, yes. And credit cards can be good too. It all depends where you stand in terms of debt and capability of using them for good. So let’s talk about that.