The average household in the USA has above 15000 dollars in credit card debt in 2015. To give you some perspective: in UK the average credit card debt per household is around 2000 pounds (around 3000 USD).
In France and Germany, credit cards are a concept that is almost unheard of. Most people use cash, debit cards or other noncash payment instruments that don’t involve any credit.
I don’t really care about why there are different credit cultures, or why credit cards are not used everywhere. Instead, I will just look at what people don’t seem to know about credit card debt.
Why is credit card debt evil?
For the lucky ones who don’t have any credit card debt and who might frown upon such despicable habits, you can stop your reading now and leave us alone. Go do push ups or something.
First, here are a couple things everyone should know about credit cards:
When you use a credit card, you borrow money.
Most people think that a credit card is just a payment tool, it’s not. It is a credit tool, and a dangerous one. I will repeat this because it is very important: every time you use a credit card, you are borrowing money.
Now this is very important because it means that if you are borrowing money from a credit issuer, they will charge you interest on your unpaid balance. Just so you know, these interests will typically be much higher than most other forms of debt. How high? Well, the national average in the USA is above 15%, and if you have a bad credit score this goes usually well beyond 20%.
If you think this is normal, you got brainwashed. This is insane! This is theft! Just imagine that if you were to borrow 1000 dollars from someone at a 15% interest rate, in 5 years you would owe more than double the initial amount!
If you make purchases on a so-called 0% balance transfer card, you may still be charged interest even if you clear the balance every month! And if you believe that you can always repay your balance during the interest-free grace period (20 to 55 days), then you are mistaken or you don’t need a credit card at all. Use cash or a debit card instead. (Here is an article explaining how grace period works: clickLink / clickLink2)
Credit cards are not free.
I am sorry, they are not. On top of the crazy rates you will be charged to purchase things daily, you will have to pay fees. Some credit cards, particularly the gold and platinum or any kind of “elite” cards will charge fees for all these “additional benefits”. In the end you will always pay for these “benefits”. Even if they waive these fees the first year and you feel you are getting many “extras”, “points” or “services”; the credit card companies are the ones making money and you are paying for all these things.
Then you have the magic of “additional fees”: overseas they charge you an exchange rate transaction fee of around 3%. You will also have to pay “cash advance” interests (around 28%), and cash withdrawal fees are usually around 2%.
So overall, the cost of using credit cards is way above any other payment tool. Not only is it a very expensive tool to make purchases, it is also a complex tool. Most people are unaware of the hidden fees or of the real interest charges they are paying. Most people have no idea how much more it will cost them to buy this car, fridge or TV with a credit card. They believe they are paying the amount they see on the price tag whereas they are actually paying much more. How much more you ask? This might not be as bad as it looks right?
After all, it might be useful to be able to afford something without paying cash, and it might seem OK to pay for such a service, if it is reasonably priced…
But if you look at the average interest rate for credit cards, if you look at the average debt in the USA and if you look at the average length of these credit loans. You will see that on average, credit card debt costs an extra 2630 dollars per year on interests alone. This figure can go up to above 6000 per year! This money could be used to make other purchases, to pay back useful debt like a student loan or a mortgage. I personally don’t think this is a reasonable price to be able to buy this couch right away…
The question is now:
How do I reduce my credit card debt?
One of the most widely used technique is the DOLP (dead on last payment) which allows you to select the credit card you can pay back first depending on how many payments you have to make to fully repay it.
This is exactly why we need an emergency basket. An emergency fund where we have some money saved to use in case life happens. And don’t worry; you will use this basket sooner or later. For some people, having a couple hundred dollars is already a big safety net. Some other people will only feel comfortable with a couple months’ expenses saved in cash. This is your call but you need to have one!
Shift your mind-set
You are probably wondering: how am I supposed to pay back my first credit card and build a safety net? I don’t have any money to save. This is why I am in debt in the first place!
This might be the biggest factor in reducing your credit card debt: you need to change your attitude toward money. If you don’t believe you can save more. If you don’t believe you can cut your expenses or increase your income to pay back your debt; then you never will.
Even if right now you don’t see any way to save one single dollar or euro toward repaying your debt, you need to believe that you will find a way.
There are countless resources, ideas and articles about how to save more and get out of debt. You just need to find one.
Starting to look for solutions will have a huge impact on your bank account; it is a routine you will have to develop on a daily basis.
How can I save more today? How can I spend less today? How can I repay my debt faster today? How can I find a new way to increase my income today? These are the kind of questions you need to ask yourself every day.
Your whole attitude about debt and money must change if you want to get new results. Especially for people struggling with credit card debt, one of the biggest problems is that every time they think or talk about money, they have negative feelings of shame, regret, guilt and fear coming up preventing them to see any opportunity to improve their financial health.
Practical steps to reduce your credit card debt:
If you are struggling to find ways to repay your credit card debt, send me your questions and I will answer them.
Performance coach, world traveler, tribe builder, NLP enthusiast and mnemonist. I am passionate about self-development and life changing coaching tools.
Video in French -