If You Have Revolving Credit Card Balances, Do NOT Use those Cards for Daily Purchases. Here's Why
I see this all the time in my practice. Clients come to me with some credit card debt. Usually, it is spread over more than one credit card and sometimes it is just one. They want to pay their credit cards down. Great, I say, and we figure out how much they can squeeze out each month to pay down their balances.
Then, they say they still use the card with the balance for their daily credit card. They ask if that’s bad. YES, it is a bad idea. Here’s why:
- You could be adding to the balance because you have to charge "stuff that happens" like car repairs and root canals. If you do not have a RAINY DAY SAVINGS account for Stuff that Happens, paying down your credit card becomes two steps forward and three steps back because you pay $300/month, but had to charge $450 for the brake job.
- You charge everyday expenses and you don't know how much you charged. Are paying extra towards the revolving balance or just paying the current purchase or not even paying the current purchase and thus adding to your revolving balance?
- Psychologically, it’s probably causing you stress just seeing that card in your wallet without a plan to really pay it down. Maybe you either just throw up your hands and say, "whatever, let's buy it" or never buy things you really need. Either is bad.
What should you be doing if you have credit card debt you want to pay down:
- Make sure you are spending less than you earn each month. Know how much you have extra each month to put towards credit card pay down. Try to make it the same amount each month.
- Have $3k ($1500 if you rent) of savings for RAINY DAY expenses. If you don't, save for it BEFORE YOU TRY TO PAY YOUR CREDIT CARDS DOWN. Without the RAINY DAY fund, you will only amass more credit card debt with your first brake job or root canal.
- Have a DIFFERENT credit card (or ONLY use your debit card) for every day use. Take the card with the balance and stick it in your drawer. Figure out what you can pay on it each month and just start throwing payments at it. No more purchases.
Sometimes it is a good idea to get a zero percent card and transfer the revolving balance to a 0% card AS LONG AS YOU CAN PAY THE BALANCE BY THE TIME THE 0% PROMO ENDS. If not, just get another card or use your debit card for daily purchases. If you get another card, YOU MUST make sure you are spending less than you earn each month and pay that new card in full each month. Let me repeat: pay the new card in full each month. If you don't do that, this whole strategy falls apart.
This recommendation of getting a new card is not license to spend more. That’s the issue in the first place. For many, credit card debt is unavoidable (e.g. medical, repair bills, etc.), but for most, it is the result of not cutting spending when necessary and THEN being hit by a medical or repair bill.
First things first: cut spending, then get a card that you can use daily and pay it off each month. Hammer away at your revolving debt by KNOWING how much extra you can send to it each month and try to make that amount consistent. It’s not easy, and it’s not fun, but it will relieve stress, and that’s pretty good, too.
4 Ways to Spend Less than You Earn - Hint: Only One Really Works
I was talking to a friend (yes, I talk about this stuff on my free time, too) and I was saying that the most critical thing about being financially secure is making sure you spend less than you earn every month, consistently, have a little bit to save and have a small cushion each month.
She said, “what if they can’t spend less than they earn?” I said people have to cut expenses until they spend less than they earn and she replied, “what if they can’t?” and I looked at her as if she had six heads and said, “what do you mean? You can’t spend money you don’t have, indefinitely. You will eventually go bankrupt.” It's shocking to me that someone would say "what if they can't," because you can ALWAYS cut even if it means moving, selling a car or public school.
Her comment reminded me of something I’ve seen with clients and I think it’s important and common enough to write about it: feeling entitled to continue spending more than you earn because you've decided something is “non-negotiable.” I often hear, "Johnny would not survive in public school." Okay, that may be true. Then move to a smaller place, sell your car and commit to Johnny's education. Do not run up credit card balances trying to do it all.
Feeling shame or embarrassment because you move to a smaller place, although very hard emotionally, is still not a good enough reason to pile up debt. There I said it. "Keeping up with the Jones'" is not a good enough reason. "Shame" is probably not the right word either, because think of the pride you will feel at being financially secure and prioritizing your family's needs.
Ok, so what can you do if things are that tight and you are consistently spending more than you earn each month? There are only 4 ways I can think of to cover yourself if your expenses are more than your income on an ongoing basis:
- Print money in your basement/counterfeit
- Earn more and/or cut expenses
- Borrow money/charge stuff
If you are doing either of the first two, please do not tell me and STOP! If you are doing the fourth, you’re going to end up with a pile of credit card debt. You can only use debt to cover your expenses when it is TEMPORARY, as in 2-3 months at most between jobs or something like that. Even then, if you have been reading my blog, you know you need 3-6 months of emergency funds for exactly that situation, i.e. a total loss of income.
The only solution that makes sustainable financial sense is increasing your earnings and/or cutting expenses. If you cannot cut enough, and that happens sometimes especially in large urban areas when you have young kids, you have to increase earnings. That means you have to get creative on the income side by doing things like AirBnB or taking on consulting work, or whatever makes sense for you. But, raising income or cutting expenses are still the only smart ways (not to mention legal ways) to handle the problem.
There is NO indefinite situation where it’s okay to just live bigger than you earn. None. It’s part of the social compact. If everyone overspent with no end in sight, we’d have a lot of people who end up bankrupt (anyone remember 2008?). Check your feelings of entitlement and see if they really fit your wallet. Then, look at what you are spending and see where you can trim and what is really important. Wouldn’t it be great to feel less stress about your finances? Here’s how you start.