WAKE UP CALL: PART TWO
May 28, 2015
This week I'm thinking about the events and realizations that got me to first start learning about personal finance. In part one, I talked about how signing up for my first 401k taught me that saving really is possible, and that even small contributions can add up in a big way. If that moment taught me about saving, I still had a whole other side of finance to understand: debt.
Wake Up Call Part Two: Maxing Out My Credit Cards
Two years ago I had about $3,200 in credit card debt — which I realize doesn’t sound that bad — but the problem was that I had been carrying most of that balance for three years, paying interest all the way. Every month I made the $25 minimum payments to my cards and had no concerns about it at all. In fact, it felt like I was gaming the system! I’d go shopping and buy hundreds of dollars of clothes and charge it to the department store credit card. I’d get tons of rewards points and coupons. And then at the end of the month I’d just pay $25! All those clothes and goodies for next to nothing! What a deal!
Yes, I know, I was incredibly stupid.
Meanwhile, the balances kept creeping up, and one day I realized that I couldn’t buy any more clothes, because I’d maxed out the (thankfully low) balances on my cards. I can’t even imagine how long this would have gone on if I’d had access to more than $3,200 of credit. I remember thinking, “I make payments every month! How is it possible that the balances only get higher?”
Um, well, Ms. Smartypants, you’ve been constantly buying things on 25% interest credit cards and making no effort to pay them off, so….
You guessed it. My minimum payments were barely paying off the interest each month, let alone lowering the principal. And as I did the math, I started to realize something.
I’d hadn’t been gaming the system; the system had been gaming me. I thought I was getting clothes for a steal, because I never felt their price. But in fact I had, over time, paid nearly three times the value of my purchases in card interest.
Now, I don’t know how a relatively intelligent person like myself decided that credit cards were magical machines that let you buy nice things and not pay for them. Either no one had really told me about the dangers and indignity of paying interest, or they told me and I just didn’t care. The rush of being able to buy whatever I wanted with (what felt like) no consequences just overwhelmed any uncomfortable advice about debt. Why would I pay extra to my credit cards when the whole point of them was that I didn’t have to pay full price for my purchases up front?
But now I couldn’t buy more clothes until I paid off the cards. And I couldn’t pay off the cards unless I made payments that actually dented the principal.
At first, I panicked. The interest was so high! Even if I paid extra to my cards, I’d still lose a half of it to interest, and then my debt would be barely lower than before. It seemed like a miserable process.
Luckily for me, I had gotten a wake up in the form of my 401k only a couple of months before, and had just come to the happy realization that you could build up a big balance of money by making small payments every month. So the same thing must be true for debt! Even if it felt underwhelming at first (oh whoop dee doo, my debt is $75 lower, someone call in Oprah to do a special on my life), it would eventually make a huge difference.
But I didn’t know quite where to start. I had different credit cards with different balances and different interest rates, and it wasn't clear how to proceed. Should I consolidate debt? Get a personal loan? Pay off all of them at once or start with just one?
I turned to my trusty friend, Google, and (trumpets sounding) found my very first finance blogs. I found people out there with stories of having crazy amounts of debt and turning it around. I discovered the Debt Snowball method and the Debt Avalanche method. I found out that people out there had advice about investing and refinancing and credit card hacking. I discovered Money Under 30’s “6 + 1 System for Financial Stability” (which I have to post about later, it totally changed my life). And I started to get excited.
I had spent years thinking I was gaming the system when I actually I was a pawn, controlled by the emotional tactics of credit cards, lenders and advertisers. Now I was going to learn everything I could so that I could understand what true success looked like. I was angry that I had been played for a fool. And when I get angry, I get motivated.
I no longer carry credit card debt. The long-story-short is that I paid off my department store cards first since they had crazy interest, and then eventually transferred the rest of my debt to a 0% interest credit card so that my small monthly payments all went to the principal. (Small payments because I was simultaneously saving and paying for my wedding! More on that later!) Meanwhile, I was reading everything about finance that I could get my hands on. I was growing and changing.
When I finally made that last credit card payment, I called my mom to celebrate. I said, "Mom, this is hundreds of dollars a month that I don't have to pay anymore!" And she said, "Wonderful! You should treat yourself to a fancy dinner to celebrate." I said, "Are you kidding, now I finally have the extra cash to open a Roth IRA!"