Personal Finance Mistake Series – Credit Card Debt
It’s probably no surprise to you that I consume lots of information via blogs, books, and other sources about investing, retirement, and personal finance. I’m a life-long learner and I love hearing what others say about subjects that interest me. That’s true whether I agree with them or not. What I’ve noticed over many years of learning from the aforementioned sources is without many exceptions, it’s easy to get the impression the writers have executed every part of their financial plan perfectly or have rarely, if ever, made a serious money blunder. I mean, that’s what makes them authoritative, right? Walking the talk, so to speak.
I’m old enough, and I daresay, wise enough, to know they’ve all made mistakes, some of them disastrous. It’s a bit of a disappointment to me that they don’t talk more about those mistakes. I’m convinced we learn from our mistakes more deeply than from our successes. I’m not advocating for constant failure, but I do think it is really valuable to study mistakes and failures as well as successes, especially if those mistakes are our own.
In the spirit of that point of view, let me share with you a series of my own mistakes over the years and what I learned from them. As you read through these, if you find yourself saying, “What was he thinking?”, then I’m pleased you have the wisdom to avoid my mistakes. Or, if you find yourself saying, “Oh yeah, I’ve done that, it sucked, and I won’t do it again”, then I’m also pleased you learned something from your own mistake, too. If, however, you find yourself saying, “I hadn’t thought about that before”, then I will be triply pleased that perhaps you can be on the watch for that particular blunder and make a choice different and better than my own. So here you are….
Revolving Credit Card Debt
That’s right, with the possible exception of payday lending and rent-to-own schemes, having month-to-month revolving credit card debt is enough to cause any personal finance pundit to spit on the ground. And yet, I’ve been there. In fact, it was so bad at one point that I got worried about making the minimum payment and had to shift the debt over to a series of other cards with zero interest introductory rates to avoid defaulting.
And you know why I’m sympathetic with other folks that get into the same situation? Because it happened gradually, punctuated by a single particularly bad decision that pushed me over the desperate edge.
How It Happened
What happened was a series of unexpected medium-sized expenses capped off by a big discretionary expense. My ex-wife had been commuting to law school in another city, about an hour drive. Unfortunately, by wintertime, the commute became untenable due to driving conditions. We clearly needed to get her a place to stay there during the week while school was in session. That required a security deposit, a month’s rent, and some miscellaneous expenses to set up a residence for her. No problem, we had a little cash reserve for times like those. It covered most of it and the rest I put on a credit card, intending to pay it off in a month. So far, so good, I guessed.
However, at that point, we already had a vacation planned for several months in the future, most of which was pre-paid, but not all. I had been counting on putting cash away over those months to pay for the remainder of the vacation. But, of course, that didn’t happen.
Living apart for most of the week and maintaining two residences (even two apartments) turned out to be more expensive than we thought. We were single earner at that point and I was traveling a lot with my job, so no real opportunities for side income.
The interest rate on the card was typical for those years – high teens as I recall. The minimum payments were manageable, but I wasn’t making much headway on the principal. I’m sure the credit card company was loving me. I remember being pissed off about it, but our cashflow was insufficient to make much headway paying it off.
Then the vacation arrived. We should have cancelled it, taken our lumps on the nonrefundable portion and gone about our lives. But, we didn’t. We went, charged up even more on the credit card, and came home to an even bigger balance and minimum payment. I know – dumb, dumb, dumb. I told you I have made bad decisions and that was a big one. That’s where the shuffling balances around to introductory zero rate cards came in. I was really pissed off then.
It took me almost 18 months to pay it off and I chose to compromise my 401(k) savings while I did so (another mistake).
There were several lessons I learned from this experience:
- Make sure I have a sufficient cash reserve to cover moderate unanticipated expenses. Not having a sufficient reserve caused me to seek “creative” methods for covering the expenses. And anytime someone uses the word “creative” around money, it usually means debt. I ended up accumulating more cash for that reserve, but it took years. I’m very unlikely to be in this situation again due to our current cash reserve and other available assets for covering unexpected expenses, but it took lots of saving discipline to get here.
- Don’t spend money we don’t have, unless it is unavoidable. The decision to go on the vacation anyway was spending money we clearly didn’t have. To make matters worse, we had no real plan on how to pay for it. So, we put it on a credit card and worried about it later. (You know, one month later). While I have willfully financed some purchases in the years since, I have not ever used credit cards like that again. And, the interest rates have been low single digits on the loans I did get. When I calculated what the interest cost was for that credit card debt years ago, it ended up being about 40% more than the principal, and that happened in only 18 months. Yuck. So much wasted money. The vacation was not worth that.
- Pay ourselves first. Yes, I know there are many exceptions to this, but I really regret deferring my retirement saving while I paid off that debt and I haven’t made that mistake since. I think about the thousands of dollars that didn’t go into my retirement portfolio 20 years ago and the possible current value if I had just kept saving. Then I get that little ill feeling. I should have sucked up the interest and taken longer to pay it off, and deferred discretionary expenses instead, but alas, the past is the past. I haven’t deferred saving for retirement since, so I modified my behavior. Move on, Jeff!
Alright, so you’ve heard about my little train wreck with revolving credit card debt. Maybe “train wreck” is a little dramatic. After all, I didn’t default and the real cost was a non-disastrous long-term financial loss of perhaps twenty thousand dollars. Of course, I would love to have that money in my retirement account today. But, the lessons I learned changed my behavior with credit card debt at a relatively early age. That likely prevented a much bigger mistake.
I’m not going to lecture you on the damage revolving credit card debt can do to your financial life, but you can avoid my mistakes if you are careful. If you have fallen into the same mistakes I made, you can recover and use the lessons learned to improve your financial situation moving forward. Don’t let mistakes discourage you from reaching your financial goals. Learn, change, and be a better custodian of your financial life.
What lessons have you learned about credit card debt?
Next up in the series will be, “Living Paycheck to Paycheck”, coming soon….
My experience with credit cards makes Jeff’s look like credit busting child’s play. I think this article would have been far more dramatic if I had written the main body instead of Jeff. Given our work travel schedules, it was best that he wrote the main article, though.
If I could have back all the money that my first husband and I paid on credit card late fees, I would probably be retired now. My first husband and I were co-dependent spenders and addicted to immediate gratification. I’m sure Citibank has a nice plaque hanging somewhere with our names on it for paying the most late fees in the 1990’s!
If there is such a thing as a negative credit score, then we probably had it.
It is a testament to Jeff’s love for me that he didn’t run the other way when he learned of my past money decisions and current (at that time) financial situation. My disclosure occurred about 8 months into our dating relationship. I was too embarrassed to tell him earlier. He was predictably appalled. As you now know, carrying a balance on a credit card is just not something he does. Without a doubt, I was the anti-Christ in his eyes (financially speaking, of course – otherwise I’m quite nice, I promise).
It took us three years into our marriage before all of that debt was paid off. I can still remember the feeling of freedom of being out from under all that debt. The pain of reducing our expenses to pay it off was totally worth it. I’ve never returned us to that situation and I never will.
My problem with credit cards was not the only money problem I had (you think?), but I’ll save that for another post down the line. The important thing is during the years being married to Jeff, my view on credit, spending, and saving have dramatically changed for the better. I’m not as focused on it as he is, but that’s why he’s our CFO.
Final Jeff Comment
I was definitely appalled, but “Anti-Christ”? I never gave our future a second thought, but we did have to do some serious debt reduction. We’re stronger as a couple for working through it together!
Posted by Jeff