Each evening this week I’ll be posting about the topics of savings and debt, which is slightly out in left-field for a weight loss blog. This discussion stems from the fact that I’m currently saving for Belt Lipectomy, a surgery that will remove the excess skin from my midsection that cannot be exercised away and that won’t fix itself over time.
As a younger man, I racked up somewhere between $15,000 and $20,000 worth of credit card debt. I called it my misspent youth. $3,000 of it was for a semester of graduate school that I didn’t get student loans to cover. $1,700 of it was for car repairs that I didn’t have the cash to pay for at the time. The rest, well, just sort of “happened.” This post, while lengthy, covers my history with spending money I didn’t have, how I decided to handle the situation that was out of control, and some tips that might help you if you find yourself with a huge amount of debt to pay back. Click through for the whole story…
From my earliest recollection, my parents didn’t have a credit card. They always spoke negatively of taking on debt. My dad, a letter carrier, died of his third heart attack when I was 10 years old, too young to really be learning about personal finance. Although my mother always handled the household finances, she never did teach me anything about managing money. I had an allowance, and I always was asking for more. I’m not sure how my mother managed to do it, but on the salary of a school cafeteria manager, she raised a “spoiled brat.”
When I got to college, my tuition, room, and board were all paid for by academic scholarship. My out-of-pocket expense to the school my first semester was for parking and textbooks, a total of $114.00. I remember the amount because I recall being upset that I had to pay it. I’ve since learned the true cost of higher education, and the burden that my students face each semester just to buy a single textbook.
Once I got my first part-time job, the credit card offers started coming in. The one I picked was Discover Card. I liked the design of the card because it had embedded sparkly bits in it. Years later, I was discussing with friends about how long it took me to pay my Discover Card off. “That thing is evil! It’s like it just grows legs and chases after you. You think you have it paid off, and then there’s one more thing you forgot that you’d bought that shows up on the bill a couple of weeks later.”
A credit card is not evil. It’s inanimate. It’s a piece of plastic with a stripe of magnetized rust. It does give the person holding it the ability to spend money they don’t have, though. This was exactly the behavior my mother allowed me to exhibit as a child, “But MoooooooooOOOOOOMMMMMM!” “Okay. This once.”
This is a long one. You might want to get a cup of coffee before you click on through to read the rest of the story.
Fifteen to Twenty Thousand Dollars Later
I had a stack of credit cards, each with a monthly minimum payment in the triple digits. What I also had was an educator’s salary. While I could afford to make the minimum monthly payments, I couldn’t afford much else. I had learned from close friends the nightmare that bankruptcy was, and it wasn’t a direction I was willing to go. Ethically, bankruptcy wasn’t an option for me anyway — I spent the money with the intention of paying it back. It would be wrong of me to try to skip out on the tab now.
Credit counseling services and debt consolidation schemes sounded promising, but looking into the practices of the outfits that were running ads on the radio and online at the time, they weren’t the kinds of folks I felt comfortable giving the reigns of my financial buggy over to, even as broken as it was. This was my mess, and I was the one responsible for fixing it.
I did a lot of reading online, and most of the sources told me that I was in a great position. I had never missed a payment on any of my accounts, I had the money to keep making monthly minimums (minima?) at my current salary, and I had enough left over to live on (barely). My first step was to stop spending.
I have a Sony e-reader sitting next to me that hasn’t moved from its spot on the DVD shelf for over four years. It was the first of its kind. It came out before the Kindle. It was revolutionary. I read one book on it. $379.99 at CompUSA. On the GM Card. I have a stereo receiver in the “Junk Room” that I bought on my Best Buy card so I could connect the PlayStation2 to it, which I also purchased on my Best Buy Card. I played a total of 3 games using that system. I’m not sure how much the total was on that purchase, but I know it was over $500.00. I bought a Canon Flatbed scanner on credit at Wal-Mart so I could scan in photos and post them online (this was way before Facebook). The following month I bought a $600 Sony Mavica camera so I could store the images straight to CD and skip taking the film to be developed.
These purchases, in retrospect, were some of the strangest decisions I’ve ever made. Well, unless you count eating 4-5 fast food meals a day. At least that was bringing money in rather than sending it out. Regardless, I was spending money I didn’t have to buy things I didn’t need, and the behavior had to stop.
I Grew Up
Do you ever walk into a room and say, “Now, why did I come in here?” I remember sitting in my car outside the mall one afternoon. I was about to go in and shop for some DVDs. The last of the video stores in the mall was closing, and they were having a going out of business sale. I got out of my car, shut the door, looked at the entrance to the mall, and asked myself, “is there really anything in there I need?” The answer was obviously, “NO!,” but it was the first time in my own life that “No” had come from within rather than from outside.
As a child, I had been told “No” a lot. In retrospect, I was told “No” because my single mother, living on the salary of a school cafeteria worker, simply didn’t have the resources to say, “Yes.” Even on the minimal income she did have, she said, “Okay,” far more than she needed to. Being “spoiled,” I took “No” as a challenge rather than a rational response. I spent a long time misunderstanding the “No” concept.”
So, there I sat, outside the mall, wondering why I was there, experiencing the same feeling that you have when you open the refrigerator door but don’t know what you were planning to take out. I got back in my car and went home. I had grown up.
I Looked At Debt Mathematically
Now that the credit cards no longer represented “freedom” or “flexibility” or “Okay.” to me, I started seeing them for what they are. No, they’re not evil. They’re inanimate pieces of plastic with magnetized rust strips. What they are is on-demand access to borrowed money at insanely high interest rates that compound daily.
When I put money in the bank, the bank pays me a small amount each month based on how much I have in the account. Next month, the bank recalculates how much they give be based on how much I initially put in plus how much they gave me last month. I earn a smidge more than the previous month. When I borrow money on a credit card, the credit card company charges me a small amount based on how much I owe them. Tomorrow, not next month, they re-calculate how much I owe them based on how much I owed them yesterday plus the smidge that they charged me over night. This happens each and every day with a credit card. It happens once a month (or once a quarter) on a savings account. I was playing a game I couldn’t win!
After stopping spending, I started looking at strategies to reduce the amounts that the credit card companies were charging me for interest. I read online that you could call the companies and ask to have your interest rate lowered. I called Discover Card, which at the time was charging me something like 15%. Do you know what they said? Sure! They lowered my interest rate by a couple of points. They also mailed me some coupons for some things that I might like to buy, but the coupons were only good if I paid for the purchase with my Discover card.
I called Citibank. I said, “Hey. Discover Card just lowered my interest rate to 12%. Can you beat that?” Do you know what they said? Sure! They also offered me a free balance transfer at 0 percent for 6 months. I wasn’t familiar with that, so I asked them to explain…
Balance transfer is where one credit card company agrees to take over debt that you owe to another credit card company. Usually, there’s a fee associated with this transaction which is around 3%. Citi Bank waived that fee for me. Now, instead of paying Discover 12% per year on my balance, I was paying Citi 11% on my balance. Just by calling and asking, the companies lowered my monthly payments.
I sloshed my money around from one card to another until I owed more of my money to the lower interest rate cards and I owed less of my money to the higher interest rate cards. Old Daniel would have seen this as an opportunity to have more cash to spend on technology or entertainment. New Daniel saw this as an opportunity to keep sending these companies the same amount of money per month, but to pay off the debt sooner. I had stumbled across something that I later found out was a part of a system called the debt “snowball.”
After I had called each of my credit card companies and found out how much my balance was, what my annual percentage rate was on that balance, and negotiated the APR down as low as they would go, I made a spreadsheet which I could sort by interest rate or balance.
The snowball approach to paying down debt is simple. First, you make all your minimum monthly payments to each and every account. Next, you identify one account to focus on. This can be the account with the smallest balance, the account with the highest interest rate, or an account that has some sort of time bomb attached, such as 90 days same as cash. After you’ve paid all the minimum payments on the other accounts, every dollar you have available for paying down debt goes to this one focus account.
In the beginning, paying $25 extra per month doesn’t do a whole lot of good when you owe a company $1,400 bucks. If you find cash laying around, you send it in to pay on this focus account. If you get a tax refund check, you apply it to this focus account. If you get birthday money, you send it in to this focus account. Each time you make a little payment, it’s called a snowflake. I took on part-time consulting work, picked up weekend shifts as a teller at the thoroughbred racetrack, and taught a few night classes to generate some extra snowflakes.
The neat thing about little snowballs rolling downhill is that they increase in size and speed as they continue on their paths. Let’s say that your minimum payment on the focus account was $100 per month. With the additional $25 you were putting toward it each month, you were sending $125 each month to pay off this account plus any snowflakes.
Once the focus account is paid off, you identify a new focus account. Using the same process, you identify one account. Let’s say that the minimum payment on your new focus account was $110. You now roll in your previous $125 per month from the previous account to the new focus account, sending them $235 each month. At this rate, you pay down this debt super fast. Still, whenever money falls into your lap, you send in your snowflakes. Before you know it, you’ve paid off your second account.
You keep rolling the money from account to account. By the time I was on my last account (American Express, last because they had such a great low interest rate), I was sending in between $400 – $600 per month. The $7,300 I owed them was paid down in no time!
When my credit cards were paid off, I suddenly had all this money that I no longer had to mail off each month. It was crazy how much money I was earning and then immediately sending away to companies for stupid crap I spent on a decade ago. It wasn’t time to start that again. It was time to prioritize my savings. We’ll save that for another day.
Know that I still have and use credit cards, but the way I use them is very different. I have a Valero card that I use to buy gas with because I save 5¢ – 10¢ per gallon by using the card. The trick to avoiding the astronomically-high interest rates is to pre-pay. I send money each month to the Valero Card people before I spend it. I always run a credit balance on my gas card. I have never paid interest on that card.
Discover Card, for as much trash as I talk about them, is still my go-to credit card. I know its number by heart, and it’s the card I use to make online purchases. It’s “the card that pays you back,” periodically crediting me 1% – 3% of the total that I’ve charged to the card. It’s important to me that I pay off the balances within 25 days, though, to avoid being charged interest, thus negating the benefit of the cash back bonus.
As you may have seen in my rice cooking video, I also take advantage of credit offers available to me through my credit unions (plural). The Arkansas Federal Credit Union is currently running a promotion that pays me $10 for charging $100 to my account in the months of April, May, and June. What they don’t know is that I’m going to be paying them back for those charges before the interest is assessed. I’ll take your $10 snowflakes and put all 3 of them toward my surgery
The take-away from this post can be summarized in bullet form most easily
- Daniel made a lot of stupid decisions when he was younger
- Daniel grew up and decided to “own” those decisions rather than “fold”
- Daniel realized a few things about bad debt behavior
- Before you can address bad behavior, you need to step back and figure out why you’re doing it
- You have to stop thinking about it emotionally and start thinking about it analytically
- You have to prioritize and strategize your efforts
- Stick to the plan and take baby steps
- Celebrate your initial successes and roll them forward
- Once you’re out of the hole, look forward and grow from the experiences
- Daniel still uses credit cards, but does so as a grown-up
If you’re dealing with debt, I would highly recommend looking into the publications of Dave Ramsey. Financial literacy is one module of a course I teach at the college, and we use his materials in my class. I wish I had seen his “Baby Steps” before I slugged through this on my own. Do check him out. If you’re local to Central Arkansas, I encourage you to check out my friend, Camille Edmisson-Wilhelmi, Esq. I’ve known her since high school, she knows where the bodies are buried, and she’s no stranger to credit card debt.