The Compounding Problem of Credit Card Debt
Dave or Susie
I won’t go into a dissertation on debt and the economy, but I will respond to an article that I read recently that posed the question, “Is Dave Ramsey’s way better, or Susie Ormond’s way better.” The question of the best way to pay down credit card debt seems like a pointless argument as there really is only one way to pay down debt. Just pay it down.
I have been listening to Dave Ramsey’s advice on managing money, and while I agree with everything he preaches, there’s a lack of practical application, and no possible way to address each and every problem out there in a few seconds on the radio. It is a “broad” transmission, after all. I have never listened to Susie Ormond, so I can’t say anything about her.
The $1000.00 Example
Credit card debt in this country is massive, and it starts with each individual’s spending habits. Before I continue, I’ll lay out a little analysis of what credit card debt actually means to you, if you have it. If you don’t, stay that way.
Let’s take $1000.00 for instance. When you purchase an item for $1000.00 using a credit card (firstly, understand you’re much more likely to purchase something if you have a credit card…retailers bank on it, literally) you’re not actually spending $1000.00. You’re spending a) $1000.00 that you don’t have yet, b) more than $1000.00 after interest adds up and c) the depreciation in value of the item you purchase. So how much are you actually spending? That depends on your interest rate. Let’s say it’s only 15% annualy. Take 15% and divide it by 365 days and you get .0004109 % per day. Now multiply that number by 30 days and you get .01232 % per month. Multiply that times your balance and you have the following.
The $1000.00 you borrowed grows in one month to $1012.32. Your minimum payment for the month is probably $15.00 on a $1000.00 balance (check your card agreement) which means that if you pay the minimum payment every month, you will pay the credit card company $1112.15 for a $1000.00 purchase for a total of $2112.15 and it will take you 11 1/2 years to pay it off. That does not take into account the decline in value of whatever it is that you purchased if it holds any value at all.
But I Rationalized My Purchase
Sure you did. Just like they planned. They know that you’ll say something like, “I’ll pay it off before the end of the month.” Thank bank on that, because it’s likely you won’t pay it off, and your payment due dates do not correspond with the end of the month. Don’t rationalize your purchases. If you have the cash to pay off the purchase, then just use the cash. Those incentive programs that they offer you, like the “no payments for 12 months” programs are designed to push you to rationalize your way into deeper debt.
“No Payments for 12 Months”
So what’s so bad about that? Well, firstly, in order to take advantage of these programs, you have to go into debt, which is not a very smart decision. It may seem great at the time, but if you’re someone with no discipline to pay the credit card off prior to the expiration date (the exact day) then you’ll be surprised at the end of the promotion period to see all of the interest for the entire 12 months slapped onto your bill. These programs are expected to attract the purchases of people who would normally not spend anything at that time. Think about all of the trips to the hardware store you’ve made that resulted in you thinking you needed more than you came to get. If you find yourself short of self control in this area, get rid of the credit cards. You’ll be surprised at how less often you browse the malls and retail stores just looking for an excuse to spend money you don’t have.
So I’m in Debt, What Do I Do?
Dave Ramsey lays it out quite simply. Look at all of your credit card statements. Put them in order of importance from the lowest balance, to the highest balance. Determine how much of your budget you can afford to pay towards your credit cards, pay the minimum payments on all of your cards, and focus the balance of your remaining budgeted payment to the card with the lowest balance. Other methods involve knocking out more than one card at a time, and this may work for you, but I have found in my life that working with one card at a time helps me reach shorter term goals more often, which gives me a sense of accomplishment, and therefore adds to the positivity that I need in my life to not feel so enslaved by the lenders.
If you aren’t familiar with Dave Ramsey, I highly recommend listening to his radio show or subscribing to his podcast. You can hear his show on his website as well. They post the show every day he’s on the air. Listening to the success stories will help you know that you can move forward in your life and get out of debt.