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Part I
Addicted to credit
Hands up if you put groceries on your credit card this week ... or a few beers with your mates. In the old days (that is, 50 or so years ago), people didnât buy a sofa if they didnât have the cash to pay for it. These days, we think nothing of taking out a loan â that is, using our credit card â to make up a shortfall in our weekly finances.
Okay, so weâre comfortable with debt. But did you ever consider the notion that flashing your plastic has become an addiction? Hereâs how to tell if youâre a little too dependent on your credit card (and what to do about it).
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Chapter 1
Question: Isnât credit card debt just something we learn to live with?
Answer: Donât get comfortable living beyond your means.
So you owe heaps of cash. Not just credit cards (theyâre a given if youâre reading this book), but maybe a mortgage, student loans, car loans, that buy-now-pay-later computer and a store card or two. When you make room for so much debt in your life, it all gets a bit ho-hum. You owe heaps. Your friends owe heaps. Why get crazy about it?
And maybe thatâs just the problem.
Thereâs been a lot written in the last few years about how status anxiety is changing our lives. Weâre all spending more and more to keep up with Mr and Mrs McMansion next door â or Mr and Ms Cooler-Than-Thou down the hall â and sinking deeper and deeper into debt. But what if itâs not just about who has the nicer car/phone/handbag? What if weâre getting up-close-and-personal with evergrowing mountains of debt simply because we canât imagine living without it?
Think about it. When our grandparents were young, debt was a Bad Thing. People spent their whole lives saving up for stuff, so that they wouldnât have to embarrass themselves by borrowing money. They wouldnât buy a new sofa or a dining table unless they had the readies.
Fast-forward a generation or two and you donât think twice about putting groceries on a credit card if youâre a bit short this week. In essence, you take out a loan to pay for your groceries. And then probably laugh about it with your mates at the pub, no blush in sight, as you drink beers youâve paid for with a cash advance. Thatâs right, a loan to buy your lager.
The facts speak for themselves:
- Australians are now spending 11.9 per cent of their income servicing debt.
- According to the Reserve Bank of Australia, credit card debt hit a record high of $44 billion in August 2008.
- The average monthly balance outstanding on an Australian credit card is more than $3200.
All of this means that most of us have some form of debt hanging over us, most of the time. No wonder weâve got used to the idea.
What does debt mean to you?
Everybodyâs idea of debt is different. Some people hate the idea of owing even $50. Those people are probably not reading this book, so weâll ignore them for now. Others think that if the bank is willing to give them a $2000 limit on their credit card, then the bank must be happy they can pay it back. Itâs not really debt if itâs institutionally approved. More like an extension of your bank account.
Still others are happy to shuffle money around over two or three cards, a mortgage, and a car loan, making sure the numbers add up just enough each month to get by. Theyâre not stressed as long as nobody cuts off their access and all the bills donât come in at once.
The point is that thereâs no âmagic numberâ that equals debt. Nobody is going to ring you up and say, âyou owe $X, you are officially in debtâ. In these days of easy credit, itâs not that hard to slip into the habit of living beyond your means. You make the minimum repayments and life goes on â after all, everyone you know is in debt too. Itâs just part of how you live. Except it doesnât have to be. It does, however, require a change in thinking.
Instead of thinking of your credit card statement as just another bill that arrives every month, look at it as the millstone it truly is. While you owe money, your income is shackled to that debt. Without it, your money is your own.
Imagine not having to sit down each month and work out how much of your precious pay packet is going to go on interest repayments. Instead, it might go towards saving for a house deposit, a fantastic holiday or, at the very least, a new pair of fully paid-off shoes or an iPhone.
Robbing Peter to ignore Paul
In some cases the money to make inroads into that debt is there â you just donât want to spend it. After all, youâve lived with the debt so long and thereâs nothing quite like the heady feeling of having money in the bank. That little ârainy dayâ nest egg that provides a cushion in case life goes pear-shaped. All financial experts say you should have one, right?
Well, yes. But not if your nest egg amounts to $1000 and your credit card debt is sitting at $2000. It might give you a warm glow to check your bank statements each month, but the truth is that you have no savings while you are paying interest of 15 per cent or more. Face it, the most youâre earning on your thousand bucks is 7.5 per cent in a high-interest online account (and this is on a good day). Even if youâre no mathematical genius, those numbers donât add up.
On the bright side, if you plough your current âsavingsâ and future amounts you were planning to âset asideâ into your credit card debt, itâs win-win. Not only will you pay down the debt, but the extra cash youâll have from not making interest repayments in the future will build your savings back up in next to no time.
More about an action plan in part 4 of this book.
Stressbusting secret
Repeat your new mantra after me: living with credit card debt is living with the knowledge that, at some point, it needs to be paid off. Living without debt is living.
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Chapter 2
Question: Why put extra cash towards my debt when it doesnât make much difference?
Answer: To see change, you must stop spending on your credit card.
You might be worried that you donât have a nest egg and that small repayments off your credit card wonât get you anywhere. Thereâs nothing less motivating than feeling that youâre going nowhere. The trouble with credit card debt is that you can pay a bit off and then next monthâs bill arrives and the interest charges seem to take you back to where you started.
And thatâs assuming youâre not spending on the card.
If youâre serious about slashing your debt, the first thing to do is to stop adding to it. Itâs easy to think that because youâve paid off $100, youâre entitled to spend it all over again. Of course, itâs easier said than done to ignore the temptation provided by a small window on an un-maxed credit card. After all, you think, the money is there. Itâs not like youâre breaking any laws or even going over your limit. And you could have it â whatever it might be â right now. Why shouldnât you? Before you know it, the card is out of your wallet, your debt is increased, and youâre walking off with the âitâ you canât live without.
The fact is that itâs just too easy to spend when thereâs a card handy. And the key to clearing your debt is to stop spending. The first step, then, to managing your credit card is to put some distance between the two of you. You wonât necessarily have to âbreak upâ if you just go âon a breakâ for a little while.
There are a few ways to do this. Some financial experts swear by the freezer method â you put the card in water, put it in the freezer, and, voila, credit card ice block! Youâd have to imagine this is possibly not that good for the card, but what it buys you is time. To make a purchase on the card, you have to defrost it. Depending on the size of the ice block in question and the weather conditions, this could take hours, or even days. The longer the better.
What this method promises is the death of the impulse purchase. If you still really want or need the item after this period of time, it can be considered a well-thought-out financial decision â an investment, even. (Most of the time you wonât even be able to remember why you wanted it in the first place.) With the decision made, itâs time to re-freeze the card until next time.
Itâs a great theory, providing a physical barrier between you and your purchase. But it does need to be approached with some caution. âI put my credit card in the freezer because Dr Phil told me toâ, says Maria, 23, from Hawthorn, Victoria. âI thought it would be a great way of literally freezing my spending.â Maria froze both her credit cards. Her debt was $5000 and sheâd decided it was time to take control. Everything went well until the day her car needed servicing.
âI realised it was time to pick up the car and I needed the card to pay for the serviceâ, she says. âWhere was the card? In the freezer. I didnât have time to wait for it to defrost, so I put the card in the microwave ... of course it didnât work after that!â
The second card was thrown out with the peas and corn during a freezer purge. âIt was the best thing I ever did!â says Maria. âI set up a constant direct debit out of my bank account so that every time I get paid, Iâm slowly paying off my debts. And because I donât have a card, Iâm not tempted to spend on it.â
These days, the only thing she keeps in the freezer is her vodka.
Do you need a keeper?
If messing about with sub-zero temperatures doesnât do it for you, you have other options. Sometimes itâs as simple as dragging in a middle man, or woman. âMy debt was around $3500 when I decided to give the card to my sister to look afterâ, says Bella, 29, from North Adelaide, South Australia. âI trust her and I assumed that the thought of her giving me That Look if I were to ask her for it would be ample deterrent. I just wanted to get some distance between me and the card.â
Unfortunately, things didnât work out quite as Bella expected. âIt turns out that my sister is not actually my keeper and treats me like an adult. If I asked her for it, she gave it to me (I probably should have given it to my mum!)â, she says.
Bella realised she would need to take responsibility for her own actions. She became very fond of lay-by and currently owes around $1800. âIâve just procured a credit card with zero per cent interest to help me get rid of itâ, she says.
More about those zero-interest cards in question 18.
Drastic measures
The truly serious or truly scared will cut the card up. Thatâs right, no access to credit until the current debt is repaid. Itâs not for the faint-hearted, but it is the most assured path to success (most of the time).
âI tried giving mine to my partner, leaving it at home, putting it in a not-so-visible section of my wallet ... and then finally chopped it up a couple of years agoâ, says Brooke, 27, from Annandale, New South Wales. âIâd paid for a few significant, unplanned expenses on my credit card and was terrified when I realised that I had nearly reached my credit limit of $7000! I knew I had to do something drastic or I would continue to reach for my card whenever I wanted to buy something.â
Initially, the drastic measure worked. âIt curtailed my spending for a little whileâ, says Brooke. âUntil I realised that I could still transfer money from my credit card to my other accounts using internet banking!â Brooke continued using this system â essentially giving herself cash advances when she wanted to spend â until she had a close look at her statements one day and received a huge reality check. âI realised how much I was paying in interest per monthâ, she says. (For more about cash advances and why they cost you more, ...
