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.
*gulp*
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.
I don’t think credit cards are bad, but as you pointed out, they make it a lot easier for us to be bad. My husband and I have a little under $60K (gulp) in credit card debt. We started tracking spending and using cash a lot (although not exclusively), as part of our plan to pay it off. We just closed on a home equity loan, and used those funds to pay off the cards. We still owe the money, but at a much lower rate. And now our house is on the line, which provides extra incentive to pay down that balance fast!
Hi Amy,
Tracking your spending is the most critical step towards paying off debt. That way, you know what you are spending, and where you are spending it. When we started doing it several years ago, we found we spent $600/month just eating out (just the two of us)! Congratulations on getting the home equity loan at a more favorable rate! I’m sure that really makes a huge difference for you two – just make sure that you two communicate often, so you know what you’re spending and where you’re spending it. Communication is really the key towards getting out of debt 🙂
Credit cards, if used to your advantage, are money-savers! I have never been in credit card debt, neither has my husband. We use credit cards that give us cash back for purchases like groceries and gas. Therefore i do use plastic whenever possible, but we have realistic spending habits. I was raised not to see credit cards as free money. It’s not. You only spend what you have wether it’s by cash or plastic.
Agree. They can be money and time-savers. We now use credit cards (almost exclusively) for the rewards at the end of the year. We have traveled for free and paid for Christmas gifts 🙂
As long as you pay them off each month – you’re good.
I’ve used credit cards my entire adult life. My husband and I have always paid the balance off in full every month. I always wondered about that truism about people spending more on cards than cash. This is probably true for a lot of people, but when we tried switching to cash, we found we spent a lot more. Because cash has always been “extra” money (small gifts, payments from selling stuff on Craigslist, etc) it was easy to fritter away. It actually took a lot more effort to record what we spent in cash than it did to just check the statements online. When we spend with a card, we have this exacting accountability. There it is on the statement- that $20 you spent on mediocre Mexican food or that $35 you spent at Target. With cash, we had to make up for that accountability by writing down each expense, which is very easy to forget to do.
Agree! Credit cards can be a huge time saver, and can simplify your monthly finances. It really seems to depend on the individual whether cash of credit cards are easier to spend. You made some excellent points.
While we pay our balance, in full each month now, that wasn’t the case about 9 years ago – when we were first married. I think it’s easy to fall into the debt-trap when you’re younger. We’re just thankful we were able to get out as quickly as we were able to.
Agreed with everything said above. I had a problem with credit card debt in my early 20s, and when my husband and I wanted to buy a house, the demerits on my credit report from those issues made it incredibly difficult for us. We now live debt-free except for our student loans and mortgage (which we’re working on paying off ASAP.) We still use credit cards, but we use them in our favor, not in the credit card companies’ favor. We use a few rewards cards for all our purchases, then the accrued money at the end of the year is our Christmas budget. We pay off the cards every Friday so the balances never get out of control and we make sure our spending stays in line with how much actual money we have. We’ve earned more than a thousand dollars in rewards and we’ve saved thousands in interest and fees by being smart and taking charge of our money instead of letting our money take charge of us!
I am down to only about $6500 in cc debt, which i am eager to pay off. I feel it is equally important for us to build our savings too —we had to dig into it a few times last year to replace our washer and dryer and I’m sure we would have charged it otherwise. It is very difficult for people to pay off credit cards when they already have a super tight budget. I get very frustrated because I keep a crazy detailed budget and still have no money left at the end. We live more frugal than most. We make everything by hand, use cloth everything, etc etc. I started a side hustle which has helped quite a bit, but still it feels like it is taking forever to make a dent in the credit card bill. The interest can really eat you alive!
You’re so right Valerie! That interest is killer! To help our snowball grow, I started a business at home. It wasn’t much, but it did help over time – which truly is key. It takes awhile to pay off big chunks! We tried selling things we didn’t use/need, put birthday cash in the bank and couponed to save every last cent. I was a bit nazi-ish, I admit, but it payed off. Keep up the good work Valerie – you CAN do this!!
This is so helpful and I am so glad I found this website! My husband and I are trying to hard to figure out a way to get rid of just credit card debt. We have been so careless and even had to put his student loans into forbarence, and we are in our last year of being able to do that. It’s getting scary, because starting next year we will have to start paying on them and I feel like we have not made even a big dent on our credit card debt or personal loans. We are in that boat where kind of live paycheck to paycheck, but this opened my eyes that we are probably eating out too much and buying drinks at the convenience store too much. I started to buy drinks at the store this week and I am so glad I did. My husband always says we should not be drinking soda, but we always end up going down the street to Sonic and paying $7 for the whole family to get a drink, I could have bought 2 12 packs of soda to last two weeks with that. It’s little things I am having to find here and there so that we do not spend that money and it can go to something else. Even with our vehicles I wish I could trade mine in, because it is pretty much new, but if I look at my credit and debt to income ratio, I am sure a car dealer will laugh and wave me off. It’s been so difficult for me to figure out how to stay afloat sometimes. I am getting to where I pay our secure debt (mortgage, vehicles) first and then find somewhere for the credit cards which ends up putting us behind or late and more charges. It”s a frustrating process, but I am hoping we will figure it out soon. I would love to start putting money into savings and seeing it pile up.
I’ve always been a compulsive spender, and have quite a bit of debt I’m finally paying off. And I’ve NEVER been able to save any money, it just burns a hole right in my pocket! But I’ve also recently been diagnosed with bi-polar, which explains SO much. More to the point, I’m on a fixed income, which make my budget really really tight, and there not really much left to shave off, except from the grocery bill. I’ve tried lots of things, but am now venturing into making things from scratch and eating less meat and more veggies. Your articles inspire me to try harder to put more than just the minimum balance toward the debts I’m currently paying off so I can afford to pay off the debts I’m not. I would love to have money in savings, but just don’t see that happening, at least not right now. But the thought of putting groceries, household items and gas on a credit card and paying it off on payday each month is intriguing… that way I could stock up on bulk items without going over my bi-weekly budget. Thank you, Tiffany, for all you and Mr Crumbs to to educate and inspire us, you rock!!
Hi Shauna,
Thank you for making the point about bi-polar and spending, the same thing happened with me! Being aware of the problem helps me when I am feeling a spending spree coming on.