Credit cards can be an amazing convenience but if they’re overused, it can be a very dangerous feedback loop. According to Consolidated Credit, the average household in 2017 owes an average of $15,799 in credit card debt alone 1. Repeating offenders are blind to their growing list of credit card transactions. This overspending has nothing to do with necessity most of the time. They want to live a certain lifestyle that is detached from their own economic reality. Overspending on credit cards has no immediate consequence. Problems only arise when the credit limit draws close. Try to follow the outline below to effectively overcome credit card addiction and take a step in the right direction.
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Four Pillars of Addiction
The most common problems associated with consumer debt I see are economical, emotional, social, and mental burdens. Debtors in denial do not keep a precise budget and very rarely do they know how largely credit card debt can impact their lives. In addition, it is not easy learning to overcome credit card addiction because every time the card is used it creates a positive feedback loop.
1. The Economical
Consumer credit card debt is the worst debt you can have. The interest rate of repaying back credit cards hovers above 15% APR easily. Needless to say, the high-interest rate is one main reason people with credit card debt stay in debt. It is hard to dig yourself out when you pay back $300 every month but the overall debt balance somehow only goes down by $50.
The minimum balance of your payment may seem doable but it is one of the many tactics credit card companies use to keep you paying back money for longer. This “longer” almost always create a bigger money problem down the road.
For example, if you are looking to buy a home or car then your credit score is pulled. The interest rate that you fetch will correlate to what interest rate you procured for said home or automobile. The domino effect of credit card debt can keep you paying extras for 30 years!
2. The Emotional
No one likes to be in debt. Emotions and money are a lot more entangled than most people think. On an extreme level ‘Debt-Anger syndrome‘ has become an actual modern medical reality.
The wear down is powerful because it is so pervasive. It contaminates even the small enjoyable things because money is always a pervasive topic. The debt can actually make you feel so stressed that breathing problems may materialize from debt anxiety. You don’t need a doctor to tell you that is no way to live a life.
3. The Social
The next natural emotional stage beside anger for those in debt is denial. Denial and anger are not emotions very far removed from each other. The consumer debt problem is worst because the nature of it is a very personal one. This is the kind of debt a borrower feels embarrassed to admit because thinking back on it…they can’t seem to recall what exact purchases got them here. Socially, debt can stunt relationships and make the debtor feel isolated and alone.
I can truthfully attest that I do find myself in a bout of sadness when I speak to those in my personal social circle who are in denial. Most often, the consumer debt load ends up being in the 5 figures before the bell goes off.
I cannot encroach my philosophy of money on them. This is a topic of personal finance. I’m a reliable source of aid when they are ready to change but any unwarranted advice from me can push debtors into further denial.
4. The Mental
Lifestyle expectation and public appearances are a common mindset for those that tend to overspend. They have a mental schema of their life and what they consider a necessity. A Starbucks coffee every morning to make the day go quicker. A tuna ceviche appetizer to compliment a great date night out. Another limited-edition makeup palette release at MAC to show off with the girls? It all adds up to an ugly balance sheet at the end of the month. Every decision you make wires your brain further a certain way so the next time, you’ll do the same action over and over.
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How Do Credit Cards Work?
Using credit cards means you don’t have to carry around cash or write checks (not that many places accept checks.) With credit cards, a person can buy things that one would have needed to wait for years to buy. It can cover large unexpected expenses too, so credit cards are not always the villain others make it out to be. They can be very useful when used correctly!
However, credit cards can charge outrageously high-interest rates so as your debt grows out of control, it could do more long-term harm than good. Credit card companies give a preset limit depending on your credit history. Higher-end credit cards (like Amex Gold or Amex Platinum) come with better perks at a higher preset limit.
My husband and I have two cards with no preset limit – both cards give great flight miles but a “no limit” card is (personally) pretty silly and incredibly dangerous in the wrong hands.
A bad credit score can impact all the circumstances related to job search and landing a good mortgage rate. A good credit history means a lower interest rate on debt payback. Lenders are trying to reduce their own risks by screening each borrower.
A commercial credit score is made up of:
*35% PAYMENT HISTORY – Based on how trusted you are to repay money that has been borrowed. Have you paid your bills on time? How often did you miss payments? How long were you late on those payments? Are there any red flags on your account such as bankruptcies, liens, and foreclosures?
*30% CREDIT UTILIZATION – This part is the funky part and I agree with Dave Ramsey that this is your “I love debt” score. Is it a business yeah? They want you to use your credit line because, at the end of the day, you have to pay it back. It’s your relationship with debt that makes up 30% of this score.
*15% LENGTH OF CREDIT HISTORY – This is simply just how long you’ve had those lines of credit open. After you’ve paid off long-term credit card debt, industry professionals typically advise you to keep the account open even if you feel tempted to close it. This is because of this 15% length of credit history to your FICO score. Credit’s big business right? They want to keep you as a customer by keeping those lines of credit open so someday, you can return as a customer!
*10% NEW DEBT – This is simply how many lines of credits have you recently opened. When lenders see a dramatic increase in new lines of debt, your FICO score is knocked down because you are now carrying more liabilities without a history on them.
*10% MIX OF CREDIT – Any type of debt you have (car loan, mortgage, construction loan etc.)
What Needs To Be Done To Stop Overspending
1. Make A Plan
If there is more than one creditor or a more complicated amount of different debts then it’s better to develop a written plan. This requires just a pen and paper to get started. Prepare the list of creditors, the balances due, current monthly (or bi-weekly) payment amounts and the interest on each card as well. Rank the debts in one of the two following orders:
- Highest interest rate to lowest interest rate
- Smallest debt to highest debt (also known as the debt snowball.)
Pay as much as you in one of the following ways above every month with all the extra money you might receive from sources like overtime work, tax refund, reducing expenses, selling of property or material possessions or inheritance.
2. Cut The Card, Not The Account
This is the most common solution and that’s because it’s effective by force. My major problem with killing the card is the outright removal of temptation but not so much the aid in producing a long-term cure. Fighting credit card addiction is as stubborn as fighting the yo-yo diet because every time the credit card is used – neurological senses fire off happy chemicals in the brain. These chemicals are responsible for addiction. The cause is very similar to any other addiction be it food, drugs or cigarettes.
When it comes time to purchase groceries, gas, and everything else, use cash. It will not trigger happy chemicals to go off. Cash might even trigger the pain receptors in the brain because handing out tangible cash is more painful than swiping a card. The money you see and feel is in front of you, leaving your hands. Plastic doesn’t have the same effect. When you feel pain with cash, you’re less likely to behave that way again in the future.
The credit cards need to be put away (try freezing them in ice and store it in the freezer) but credit card accounts should not be canceled or closed because closing credit history is detrimental to your overall credit score.
3. Make a Budget & Get Addicted
Get into the habit of budgeting at least biweekly. Most people have heard about the importance of budgeting a thousand times over and rarely is it a pleasant word. That is because it is the best solution if you truly want financial assurance.
For spending addicts that are battling credit card addiction, it’s best to take the following to heart: the only caveat for a budget is you can make it work for you. Reverse spending works. Or if you need to track every single dollar you spend down to the exact amount on your budget sheet then that’s OK too.
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Budgeting is critical to financial freedom. Budgeting on time keeps you on track and away from debt.
My husband and I have no personal debt and we save earnestly every year – made possible because we have a budget and we watch our spending. The age-old mantra “you need money to make money” is incredibly true. Budgeting helps you build wealth so you can live a better life.
There is no point to a budget if you do it a few times and then forget about it. You will be back to the old false positive feedback loop in no time.
4. Side Hustle Like Crazy
There are anti-side hustle groups out there. Why? Because side hustling normalizes poverty in an area of increasing income inequality. The more a person works the less tempted they feel to overspend. The idle hand is a dangerous one. Make sure to keep yourself busy for the duration of your debt payback plan. Look online for different gigs that can help you conquer idleness. Sell unused old clothes on various websites. Find gigs on Fiverr or pet sitting on Rover.
$5 for this and $20 for that might not seem like much but math-money-magic adds up. At the end of the day, you will be surprised how much you made and how little you will miss that possession you’ve sold.
5. Transfer Owed Balances to a Lower-Interest Credit Card
We have all seen those “0% APR** for the first six months ***” credit card offers. Transferring your credit card balance to a lower interest card works if you can pay back the owed balance before the promotional interest rate ends. Always read the fine print because after the promotional offer ends, these “low-interest-rate” credit cards can jump higher than the interest rate on the card you have now.
6. Pay More Than The Minimum
The minimum monthly payment for most credit cards is only about 2% of the balance. Paying the minimum is the greatest sucker move in financial history. It really is! Paying the minimum will turn a $2,000 balance into almost $8,000 over the course of decades. You would end up paying 400% the original amount.
When you start saving more money (by keeping a good up-to-date budget) pay off your credit card debts as much as you can. If you are feeling the crunch of the budget then you are on the right track. No pain, no gain. I do not believe in a “treat” right after the debt (or part of) the debt has been paying off. The “treat yourself” mentality might start another positive feedback loop and a day will come where one find themselves right back in the same predicament.
7. Non-Profit Credit Counseling Services
Credit counseling agencies can consolidate debt into one doable monthly bill. The agency gets your payments and helps you distribute the money to all creditors. Creditors may accept a lower monthly payment if the credit counseling agency you are working with is a reputable one. In order to work with a reputable agency, there needs to be agreement on not using or applying for new credit lines as well as pro-actively participating in debt repayment.
8. Create a Substitute Behavior
This is a working theory but to overcome credit card addiction, you would need to overcome a shopping addiction. Leaving the wallet at home and going window shopping will cause some serious temptation. This theory is very similar to using systematic desensitization to overcome irrational excessive fears in patients. The patient is overexposed and soon the fear becomes less than less powerful. If you are exposed to window shopping but without the means of actual purchase then eventually the shopping urges will weaken.
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9. Battle Recidivism
Try to think of credit card debt as the horror movie that never ends. “It” isn’t the killer clown from Stephen King’s novel. “It” isn’t the ugly swamp monster that crawls out on the screen on low-budget movie Tuesdays on Channel 4. This “It” is much, much more terrifying because unlike a movie or book that eventually ends whereas “It” does not end. “It” can haunt you forever and beyond the grave…with a compounded 22% APR. “It” is credit card addiction. No sir and or ma’am, “It” is no day at the beach.
Have you dealt with credit card addiction? What is your favorite way to limit spending?
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Justin @ Atypical Life says
Awesome post Frugal Gene! This hits close to home for me because I have seen many in my family fall into the trap of credit card debt. Credit cards are a gift to the financially savvy for the rewards and death trap for those that are not wary.
I thousand percent agree Justin (if 1000% was possible haha.) Thanks for stopping by too!
Mrs. Adventure Rich says
This is a really great breakdown of both the factors going into credit card debt (your “4 Pillars”) and the tactics/resources one could use to get out of debt. Great article!
Thank you Mrs. AR :)!
Love the detailed look into credit cards and how they work! They sure can be sneaky, and it’s important to get them paid off ASAP if at all possible It’s so frustrating how easily people can become trapped in a spiral of debt.
It really is! I once had a credit card that (at the time of sign up) had no annual fee, two years later I went into the bank to question a 65 dollar charge and they told me the card now has fees. Uh, y’all sneaky!!!
Kim Sheets says
6 years ago I discovered my then spouse had ran up over $80,000 on secret credit cards. Then, also a line of credit at the bank, where he worked, for over $200,000. Then ther e were unpaid bills around town also. The credit card statements went to a PO Box that was checked only by the ex spouse. All this debt was unsecured. It was not the first occurrence of such practice/behavior but had been faith healed by his parents to never participate in this again ! It was by accident this was discovered. He ran away and lied about all of this. I now realize it was probably guilt, shame and denial that he was experiencing, but of course he said it was all my fault. Ha I had no knowledge of it. This is true addiction.
The Frugal Gene says
Wow Kim! That is unbelievable, I’m so sorry you had to go through that. It is definitely something people can be sensitive about, I have a friend like this too. Thankfully we’re friends, a spouse is about 10x harder and more personal.