The primary reason that credit cards are evil is simply that they are a gamble at best. If you do not have money to pay for something today, then you are betting that five years from now, you will have the money. And in the meantime, you reduce your monthly spending power by a minimum payment. The combination of these two is dastardly; you will simply never be able to save enough money to pay the cards off while paying the minimum payment every month. This is a simple concept to understand, because how else would creditors make money? They prefer you to keep a balance, making those minimum payments until you die. Even with the new laws requiring principal to be paid off each month, it still takes years to recover from a single purchase. Yes, you might have bought that laptop on sale, but you spend eight years paying it off? Not smart. And it’s not only your fault; it’s how the very industry is set up.

So, what’s wrong with thinking you’ll have more money tomorrow than today? Well, for starters, check out our economy. You might not even have a job tomorrow! A close second is that mathematically, we simply don’t make more money, despite raises. Here’s a look at it using college macroeconomics…

United States GDP (per capita) only increases an average of 2% each year [source]. Now, that is actual economic growth per living person, adjusted for inflation. This means that unless you are in an industry of uncommonly high growth, you can expect to have an income increase of a maximum of 2% each year. In actuality, that percentage trickles down from the CEO, so you might be left with 1% growth at best. Unless you do something like get a degree, change careers, or get a promotion, you simply won’t have more money next year than this year. And thanks to the trillions of dollars in bailouts (inflation fodder), you will probably make less money this year than you did last year!

On the other hand, credit cards charge an average interest rate of 14%. This means that over the course of a year, you get charged 14% to use that credit card. Meanwhile, you make 1% more money. You’re doing 1% better, but paying at a rate of 14% extra! That speaks for itself. Now, if you only have a few hundred dollars on the card, that 14% may work out to equal the 1%, and you might be able to pay it off. But for many people, they hold half their annual salary on those cards, meaning it’s still seven times greater than what you gained in income. Add in the factor that people with that much debt typically have greater than 14% interest, and the situation clearly worsens.

Thus, credit cards are not a sustainable system. And this is part of why we’re in this economic mess today. Some people are able to not get trapped; either they don’t get too far in debt, wind up changing careers or making more money, or happen to be in a lucky field that makes more than the average GDP growth. But, for every industry growing faster with respect to GDP, there is an industry or two that is growing slower than the average GDP. This means that some people aren’t even getting that 1% increase each year. Some people don’t even get an increase equal to inflation!

If you still carry credit card debt, get started today on eradicating that junk! You will have to decrease your lifestyle, pick up second jobs, find things to sell, etc., but the freedom is worth it! It has been incredible to see those dollars gradually roll away, and actually have more discretionary income to use once those cards get paid off! That sense of freedom is totally better than the coolness of having a new TV paid for with a credit card. 

Look, we all want cool things, but seriously, save for them. If you can’t afford it by saving for it, you definitely cannot afford it by using a credit card. I hope I showed you how mathematically unsound they are in terms of economics. Yes, you might be one of the lucky ones who are able to use them without getting trapped, but it’s a gamble. Like a casino, the house always wins.

Basically, my credit card debt totals $8,486.40, with an interest rate range from 19.99% to 32.24%. My car note is around $10,000 left, but at an interest rate of 4.9%, since it’s under my father’s name. I’ll be working on credit cards first, then student loans, paying the minimum on my car note, since it will be the least interest rate the whole way. I do not have my student loans consolidated, and do not know the total amount, but I plan by the end of this year to have them both consolidated and have a plan to repay them quickly. As I said before, I do not have to worry about them quite yet, as I’m back in school and no longer need to make payments each month. And oh yeah, not consolidating them while I was in school initially was a bad mistake.

As far as good things I’ve done along the way, I have started donating to a retirement IRA, at 3% employer matched funds. The balance is up to about $6,200 right now, which means around $60k in retirement dollars, at easy levels of return. That was a good decision. Even though that 3% would have helped a little towards my debt, an extra $20/month is not worth missing out on getting an extra $20 and starting a decent retirement cache, especially at a young enough age to really make the interest work for me down the road.

The bad things I’ve done are mostly from being stupid, lazy, or procrastinating. The main one being that as I’ve analyzed my current state, I see that fees comprise about 28% of my total income. Meaning that because of overdrafts, late fees, NSF fees, checking account fees, and so on, I have wasted several hundred dollars every month. Right now, I don’t need to focus on making extra payments to the cards, I need to focus on making the minimum payments on time, to get my budget in order. To do that, I need to cut spending, and also from analyzing my payments I can see that eating out takes a big chunk of my money.

My goal for June is to start cooking more at home, and eat out rarely or never. I need to do whatever it takes to make my minimum payments on time. I have already enrolled in auto-payment plans with my credit cards, but in order to make that work I need to cut spending so I don’t overdraft. If I can have one month with no extraneous fees, that will be a giant step forward into figuring out how I even can budget to get rid of this debt. From calculation, it looks as if I will be able to initially put $300 extra toward repayment.

Each month I will make a new post, as well as update my debt ledger. I will also blog about the tools I’m using to accomplish this, along the way.

I received my first credit card my freshman year in college, 6 years ago. What did I sell my credit-virgin soul for? A school T-shirt. Granted, that was one extra day I didn’t have to wash clothes, but it was hardly worth my current agony. I sometimes wish I could view back in time to see who else was wearing that particular shirt. I wonder if they also have credit problems now.

At any rate, I was a fairly intelligent kid. Went to a great school, always excelled in book smarts. I even had a budget. However, there’s something about that little piece of plastic that can twist your intelligence, making you think “oh, I can spend $500 here, it’s only like 20 bucks per month”. And I was right, I could have paid that off. However, that $500 grows into $1,000. That’s not even too bad, I could afford it then.

The kicker was when I had a bad month, or really a bad year. I lost the scholarship I came to school with, and was forced to take loans. However, I was in an apartment, and still needed money to live on, as the loans only gave me about $400 to live on that semester. You guessed it; credit card to the rescue! And one was no longer enough; I got a 0% interest card to move my balance to. It was smart at the time, but it assumed I would be able to pay it off somehow in the next year.

That’s the assumption most people have before they have to “grow up”. I don’t claim to be fully grown yet, but I have reached the epiphany that I’m probably not going to win a lottery, create the next billion-dollar idea, or magically inherit a million dollars from a long-lost uncle. I grew up without money, nobody in my family has money, everyone I grew up around was also in debt. I think the magical money rescue is never going to happen. I may be wrong; it might happen. But I can no longer live my life as if it’s a guarantee.

Anyway, that $2k balance quickly turned into $3k, and into $6k. Before I knew it I had 4 cards and was already starting to miss payments here and there. Fees started coming, my interest rates skyrocketed, and it placed me into a position where it will now be next to impossible to easily pay them off quickly. It’s going to be quite difficult. Furthermore, it’s ruined my credit and left me in a position where if I marry soon, we’ll be lucky to get a house in the next decade.

On top of all the credit card debt I have the obligatory car loan, and student loans from the 4 years I went there. However, the car loan is less than my credit cards right now since it’s under my father’s name, and my student loans are still under deferment since I’m still in school (dropped out temporarily to work full time; the result of bad credit decisions). So, neither of those are posing an immediate threat to me. It’s the credit cards that need to go, and soon.

The kicker is that during all that, there was a 12 month period where I made about $60,000 while in school! Even after having to maintain two apartments (I was away on contract and still had an apartment back home), that would have been plenty of money to erase all my credit card and student loan debt. But, I was stupid, and used it all to eat at nice restaurants and buying a new gaming computer, an ipod, a car stereo system, things like that. It’s amazing how far $60,000 won’t go when you’re spending it on that sort of junk. The thing is, none of it is around now! Oh, it makes me sick. By now, with the money I’ve put towards credit cards in the years after, I could have a solid down payment for a house, and no car note at all if I would have paid it all off then. Not to mention no student loans haunting me now.

So, there you have it. No amazing reason I’m in debt, just the general deceptive nature credit has, and the psychology of a person who grew up without having everything he wanted. Oh, I made up for that by buying everything I desired, but quicky realized it’s not worth the stress it causes down the road. It’s totally worth living in a poopy house and going without things in order to get finances together. If I put that $400 for an ipod in mutual finds, I can buy 10 ipods when I retire. I’m a scientist and mathematically-oriented person, and those numbers make sense to me. Saving money instead of spending it at my age gives you a whole order of magnitude more money down the road. I’m just glad I’m starting this at 24. Beats trying to figure it all out after a family comes into play, and I have ample respect for those who do.