Stop Using Credit Cards

If you only do one thing to improve your financial life that one thing should be to stop using credit cards. I have been living a debt free lifestyle for 9 ½ years and I too sometimes fall under the lure of the easy access, getting it now, pay later, etc.  We all can be vulnerable. I've said it many times, we are creatures of habit and change does not come easy to most of us. Many experts say that doing something 21 times makes it a habit so we should choose to do good, productive, healthy things 21 times to make that habit. So let’s try with not using our credit card for any purchase for the next 21 days or next 21 one purchases.

You know the truth about credit cards, we trade quick pleasure (I want it now) for long term pain (pay excessive amount of money in interest charges).  I need new appliances, I can get them by noon tomorrow if charge it on my 18% APR, Annual Percentage Rate, "Disaster Card." If I make the minimum payment I will pay off my new appliances about 5 years after I need more new appliances, it will take me 21 years and 3 months to pay off the $2,000 charge on my credit card. I will end up paying $12,750 for $2,000 worth of appliances. Who got the deal here?

This is what it comes down to...looking at the purchases we make in total cost, not jus the fancy, bright light, get it today cost. Do you know anyone that is willing to pay more than 6 times the value for a product that depreciates?

So how exactly do we go from habitual credit card use to stopping? The same way you eat an elephant, one bite at a time.

First look at what you are charging. Are you using your card to pay for monthly expenses that come due before payday? If this is the case then you have to modify, change when you make those purchases, your spending. I worked with a family that earned a six-figure income and would periodically get their utilities turned off due to non-payment. It was not that they did not make enough money it was when they were spending it. You need to make a simple timeline, that shows when bills, expenses, debts need to be paid and from that time line put in your pay days and match them up until the amounts equal. It really is that simple.

Let’s look at the previous family; they spent about $700 a month on food for a family of 5. The first of the month mom would go out and charge about $500 when pay day was still 7-9 days away. Just because it is the first of the month, or the 15th or the 30th doesn’t mean you have to spend. You can only spend when you have the cash. So this family budgeted the same $700 a month, but now when the first pay day of the month comes $400 is put in a cash envelope that is labeled “FOOD”, when Mom goes to the grocery store she can not spend more than what is in the cash envelope. The next pay day $300 is put in the envelope and no more charges on the credit card for food.

Inevitably when they would get their credit card statement sometimes they would have the cash to pay the charges, but things (unplanned spending) would come up and eat into that cash so roll over balance would incur.  In a one year period they racked up tens of thousands of dollars on their credit card for purchases they were going to pay off as soon as the bill came in...this thinking just doesn’t work for most of us.

Clothing, vacations, entertainment, gifts these are all expenses we know we will have so why don’t we plan for them?  Just because I don’t have any coming due this month, doesn’t mean I should not budget for them. We need to look at what we spend annually in every category and divide that number by 12 the result is the amount of money that should be budgeted each month. Those months that have no expenditure going out for a particular category needs to be set aside for later use. I recall a family that didn’t like this idea of mine, because his monthly amount was more than normal, but in the long run his annual spending decreased. Because it was controlled, it was planned. For example this family would spend $3000-4000 on Christmas every year and typically it was paid from taking money out of savings or putting it on a credit card. We determined that $3600 was the annual amount they would spend and we budgeted $300 each month. Now when it came time to buy Christmas gifts they had the cash readily available. His concern was that we were increasing the monthly expenses by $300 over what they did in the past, but he did not account for the overspending and the money they paid in interest when they charged the gifts. Sometimes this takes getting use to, which is planning for expenses. Yes, the monthly amount may be more, but it doesn’t mean it is unrealistic. What it means is that you have agreed on amount you will spend for a particular expense (Christmas, vacation, gifts, etc.) and now spread that amount over 12 months instead of running around like chicken with your head cut off trying to figure out how to pay for it. It’s called planning, budgeting.

Stop using your credit card, unless it is an emergency and you have no other way to take care of it. Decide on amount you spend on the flexible categories in your family, budget the amount each month, utilize the cash envelope system for smaller and frequently used categories (food, gas, entertainment) and set the money aside in an interest bearing account for the bigger amounts, less frequently used (property taxes, Christmas, vacations, new appliances).  This way when the expense/event comes due you have the money and will find no need to use your credit card. I know how I can save over $600 a year...save and pay cash for my new appliances. What about you...how much can you save by living a lifestyle of no debt?