I got my first credit card when I was in college. I had somehow gotten pre-approved for a card with a $500 limit. All I had to do was fill out a form and mail it back to the bank. My parents had just gotten me my own car, which I needed for a co-op job at a power plant that was roughly 20 miles from civilization.
My dad was not particularly fond of the idea of his son carrying around easy access to debt, and my mom seemed a little more neutral on the idea (though, still not exactly positive). Still, I made my case that having a little bit of an extra credit line could come in handy if I ever needed any car repairs. Ultimately, my parents agreed to let me apply, and I had my first piece of plastic to go in my wallet.
If you’ve read some of my earlier posts, you know that it wasn’t this particular card that got me into trouble. It was actually later in life that things got out of hand.
But, as time went on and I actually started earning a decent income, I would add a few more credit cards to my collection…with higher credit lines to go with them. And, of course, because I was being “responsible” in my use of these credit lines, banks were very willing to give me a nice little bump up in that credit line.
And, to a point, I was fine. I would let these credit cards take up residence in my financial house, and the credit line would be there to help out when needed.
And, for a while, everything was good between me and credit cards. I spent; I paid. And, everything was…OK.
But, eventually, I didn’t pay…for everything…all at once. I let it go because, along with those increased credit lines, I was also being granted cheaper debt. (I had one card with an interest rate around 6.9%. That wasn’t an introductory rate; and, that wasn’t a typo.)
My runaway spending would start off with some extra speculation on sports cards and other sports memorabilia. You know, “investments” and such…most of it is essentially worthless, now. From there, things went downhill. At some point, my spending deteriorated into what I refer to as the “Tug McGraw plan.” (The late Tug McGraw once repsonded to a question about how he’d spend the money offered in a lucrative baseball contract he had just signed by saying that he’d probably spend about 90% of it on women, booze, and good times, and the rest, he’d probably waste.)
As credit lines got increased, and interest rates were cut, my debt level rose along with it all. Until I found myself in a bit more debt than I ever wanted. I had invited credit card debt into my house, didn’t set proper boundaries, and, now, it wouldn’t leave.
And, it was taking my stuff. Suddenly, I didn’t feel comfortable going out; that costs money…that I needed to pay down my credit cards. Worse, any money I could put in a savings account just needed to come right back out within a a month. And, the kid who was always fascinated by the world of investing didn’t have any extra money to invest.
No matter how much I wanted all of this debt to just go away, I knew I was going to have to force it out. Revolving debt had become a persistent houseguest, and I could only blame myself for the fact that it was there.
So, here are a few takeaways from this long episode from the life of James…
Card Companies Can Change the Definition of “Good” Whenever They Want.
Despite being burdened by a very large amount of debt, somehow, I never had any issues with paying the bills on time. Imagine my surprise to see that the interest charged on one of my card statements had almost tripled when compared to the previous month.
Why? I was never late. Actually, I usually paid the bill almost as soon as I had received it. And, I was good; I was responsible. That’s why you kept raising my limit!
But, things were now a little different.
Apparently, there was some sort of downturn in the economy around that time, and enough other customers were unable to pay their bills to throw me into a higher risk bucket in the eyes of my gracious lenders. Suddenly, I was less responsible and a bit riskier.
In truth, I was always being irresponsible with my credit cards, and I was always a bit of a high risk customer because of it. To top it off, I also believed that higher lines of credit was a good thing for me…that it meant I was “making it.” In other words, I was stupid. While the card companies usually outlione how your interest rate can change because of late or missed payments for you, remember that they can change those rates on you even if you always pay on time.
Interest on Revolving Debt is a “Passive Expense.”
If you’ve read many articles and blog posts in financial media, you might have seen the term “passive income.” The first time I remember reading about this “passive income” was in Robert Kiyosaki’s Rich Dad, Poor Dad. The term is used to describe income that is earned from owning assets rather than from working a job yourself.
Interest on revolving debt is kind of the opposite. When it comes to interest on credit cards, you spend your money and get nothing for it. No new stuff; you just get to keep paying extra for stuff you’ve already bought. I like to think of it as a “passive expense” for this reason. Though, I like Dave Ramsey‘s “stupid tax” description, as well.
Whatever you want to call it, it isn’t a good thing.
Revolving Debt Can Cost You a Lot More Than Money.
When my debts were at their peak, and most of the time before and after that point, I had a tendency to withdraw from certain situations. I would limit my social outings, which also limited the relationships I had formed. I didn’t get to know the friends I already had much better, and I had fewer opportunities to meet new people.
When an opportunity to serve with my church’s small group would come up, my mind would focus more on myself than who we were serving. “Sign up to help with supplies? How much is that going cost me? How much gas am I going to burn in the process of this whole thing?”
Basically, I was big-time selfish over small-time stuff. Small-time stuff that was much bigger to those on the other side of the equation.
I try to show that I’ve learned from those times as much as I can.
And, I never want to go back there.
If You’re Going to Carry Credit, You Better Have Some Rules
It may surprise you, but I still use credit cards, today. However, I’ve learned to set boundaries around how I use them to ensure that things don’t get out of hand. Sure, there’s the obvious rule about paying the balance in full every month. But, I have a few more rules that lead up to making that first rule possible. I’ll get into more detail about those rules more in my next post. Until then…
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