spinning changeCredit: Ryan McGehee

I am amazed every time I see a news article with the amount of money the average person owes in credit card debt.  The amount of money every one of those people are throwing away every month in interest payments is astounding.  


What is your average credit card interest rate these days...something around 15% according to some sources. (2014)


They then say the average household credit card debt is around the $15,500 mark for households that carry a balance. Wow...that’s more than I made a year when I first got married.


According to one credit card calculator with the above numbers you will end up paying over $10,000 dollars in interest if you stopped buying more stuff and just payed off the existing balance of $15,500.  $10,000 dollars that you did not get to use...just thrown away.  Think how much cool stuff that $10,000 could have purchased if you was willing to wait just a little while longer to have it. Not only that but you will have that debt hanging over your head for 10 or more years while you try to get out from under it.


Now I may not be the best person to tell you how to get out of credit card debt since I have never had any, but as I think you may have deducted from my comment above about my wage starting out in life I have been dirt poor.  According to government guidelines I have lived in “poverty” my whole life, but I don’t feel like I have and a big part of that is because I have not been throwing money away in the credit card interest machine but have been able to use that money for things in my life instead.  Let me give you some ideas of how I have done this...your mileage may vary.

One of the simplest principles that was drilled into my head as a youngster was that if you didn’t have the money for it right then, right there you didn’t buy it.  My parents didn’t even have a credit card most of my life.  Now I could stop right there and say there you go….that’s the secret but there is a lot more to it than that and I found out early on in life that I could leverage having a credit card without having to be a slave to paying interest every month and those are the stories that I want to share with you.


I remember the first time I was sent a credit card application for a rewards card, actually it may not have been the first time but the first time I looked at one.  All credit card applications went into the trash.  I wasn’t interested because I knew they were a trap...that had been drilled into my head for years.  Anyway looking at the rewards card my wife’s and my brains began to turn, we began to ask ourselves if there was a way we could leverage this and keep ourselves from falling into the trap that I had seen others fall into.  We decided we could but only if we proceeded with caution. We established ourselves very strict rules on what it would mean for us to have a credit card.  I feel that is a very critical part of this process...establishing rules and understanding why and when you will use a credit card. 


 Rule # 1

 It is very critical when you look for a credit card that you make sure the card has no monthly or yearly fees for using it other than interest on purchased items.  You also want to make sure you get a card that has 20-30 day grace period on purchases (which means that if you pay your card off every month you gain no interest on the items you have purchased).  


I also looked for a card that gave at least 1% in rewards points on purchases.  The current card I use pays 1% on most purchases and 5% on purchases from their select stores.  I have acquired a large amount of free stuff that I would never have had by using their cards judiciously.  


Rules # 2 & 3 

Don’t buy something if you don’t need it and buy used when you can and it can fill your need. With Craigslist and local Facebook buy and sell groups you can find almost everything you could need for way less than new.

Now we were poor and it sure could have tempted us to use our new-found access to funds to run out and buy a new couch or update our pitiful wardrobe but that wasn’t in the rules.  One thing I see young people do is think they must have new and buy new...you don’t.  If you have too much pride to be seen in some pre-owned clothes or to have a couch that somebody else has upgraded from then you may have your priorities skewed.  One of the key rules to keeping your debt under control is learning that you do not have to have new all the time.  I know it may not be the cool thing to do and oh my gosh your “friends” would just die if they knew it was used...oh well, get over it.  I’m sure those same friends pretend they are part of the “green” movement too, you just saved something from going to a landfill and a new item didn’t have to be made to fulfill your needs so you just helped save a ton of resources, double bonus.  


Rule # 4

Track credit card spending to the penny and make sure it doesn’t exceed current cash availability.  Now contrary to the way it is sounding I actually use my credit card often - gasoline, groceries, and utility bills (at least the ones that will take credit cards) are mostly done on the rewards credit cards.  These are costs that are easily budgeted and don’t vary a lot from month to month so a person can usually keep from falling into a trap of overspending on these items.  With these being monthly budgeted items it is also fairly easy to predict how much you will be accumulating from your rewards card which can help you plan when and how you will spend that free money they are going to be giving you.  The only way this part of the equation will work though is if you keep a detailed budget and up to date book work on how much money you do have and have already spent.  Remember the simple principle that was drilled into my head as a kid...if you don’t have it don’t spend it.  We are still applying that principle even though we are using a credit card, we are only spending what we could if we had to pay for it today, but we are making money by not using our money today but using the credit cards money. Now you're starting to see why the rewards cards are so important.   When a person goes on a diet most of the diets will tell you that you have to keep track of your calories...if you are serious about it you have to keep track of your calories.  Well we are on a financial diet...you have to keep track of what you earn and what you spend...to the dollar, no exceptions.  That is the only way this is going to work, trust me it is worth the effort in the long run.


Rule # 5

save up those rewards and use them for something nice for yourself.  I use a rewards card from a company that has a lot of items I already would love to buy. Instead of spending my hard-earned cash every few months I get to pick something for free from them and use my rewards points.  It’s a win-win, so far I haven’t paid a dime in interest because I am only using the card for things I could have paid cash for already but I can leave the cash in my bank account and if the interest rates on savings would ever go back up I could actually make a some money there too (though with the small amounts of money we are talking it would never be much) and I get free new stuff for using their money for a month.  


Another small bonus in the fact that we use our credit card to pay our monthly utilities is that we are saving postage too, we only send one check to our credit card company a month with only one stamp instead of sending a payment to 5 or more companies every single month.  I know it’s only a few cents but trust me over a few years that snowballs into a brand new pair of boots or something else that you don’t have to end up paying interest on for the privilege of owning.


Hopefully this can give you some ideas and motivate you to stay out of credit card debt.  I will be submitting more ideas on this subject and will be linking to these articles here as we build a resource to help you do as one famous financial teacher says “Live like no one else today so that you can live like nobody else latter” or something along those lines.