We are a nation addicted to credit card debt. Americans have amassed $857 billion of it. As we begin to forget the 2008 financial crisis, banks have once again started aggressively marketing credit cards. I receive mail every week promising me bonus points, extra cash back and a lifetime of plastic-induced happiness. The marketing is working. In April, credit card debt grew at 11.5%, its fastest pace in years.
Credit cards can be remarkably useful and lucrative spending tools, when used responsibly. If you pay your balance in full and on time every month, you are receiving an interest free loan, often with some airline miles on top. However, over 40% of Americans are not able to pay their balance in full. Instead, they are borrowing money at interest rates that are usually well above 15%. That means the typical family is paying over $1,500 of interest every year. In a world where middle class families feel increasingly squeezed, this is too much money to be lost to interest.
Why do credit cards have this power over us? Why does the average household have more than $10,000 of credit card debt at interest rates well above 15%? And how can we break the cycle and get out of debt?
Today I am publishing a Forbes eBook, “Secrets from An Ex-Banker: How To Crush Credit Card Debt.” This book uses my nearly 15 years of insider experience as a credit card executive to help you become debt-free forever. I helped introduce credit cards to the Russian market with Citibank. I ran the UK consumer credit card franchise of Barclays. But now I am focused on using my knowledge of how the industry works to help people avoid the tricks, traps and pitfalls of credit card debt.
Being in debt does not need to be a life sentence. You can break the debt cycle. Traveling the country, I have helped countless people put together plans to become debt-free. And most people were surprised at how much power and how many options they actually had. It is very easy to sit back and let credit card debt control your life. But I want to help you take control of your life and crush credit card debt forever.
Why Are Credit Cards So Tempting?
Diners Club invented the credit card in 1950. The purpose of the Diners Club was to make it easier to make payments. Diners would no longer need to carry cash. And restaurants could reduce the amount of cash they needed to keep in their registers. It was a great deal for both sides.
Over time, credit cards evolved from being a payment tool to a borrowing trap. Most of the money is now made from the interest charged on balances.
The credit card has been designed to lull you into debt. Credit limits are usually a multiple of your monthly gross income. It is very common to see a credit limit that is at least twice your monthly gross income, and sometimes even higher than that. The minimum payment is shockingly small, usually only 2% of the balance.
When people spend with plastic, they usually spend more than if they were carrying cash. So, you end up spending just a little bit more than you should every day. And when the bill comes due at the end of the month, it is very easy to just pay what you can afford, and worry about the rest of the balance another day.
Why Do We Have So Much Debt?
I have met with many people buried in credit card debt. I always ask them how they got into debt. And the vast majority of people can’t remember what they bought. It is very rare to get into credit card debt because of a single, large purchase. Instead, people usually just spend $10 more than they should, ever day. In just three years, you can have over $10,000 of debt, just $10 at a time.
If you started every day with a pile of cash, you would be much more likely to limit your spending. After every purchase, you feel that pile of cash get lighter. But with a credit card, you can just swipe and enjoy.
Credit card balances usually build up over 12-18 months. And then they reach their “steady-state balance.” That is industry language for a balance that never goes down. Your monthly payment barely covers the interest accrued and new purchases made in the month.
How Can We Break The Cycle of Debt?
I will help you put together a plan to get out of debt. In the book, I focus on a few key questions:
- Should you be trusted with a credit card? Gambling addicts should not move to Las Vegas. Equally, some people should never use a credit card again. I will ask you some tough questions to see if you can handle carrying that temptation in your wallet.
- Are your fixed expenses too high? Credit card debt may just be the symptom of a bigger problem. You might have purchased a house or car that you can’t afford. As a result, you will always struggle to get through the month until you reduce your fixed costs. I will help you do the math and find the true source of your budget problems.
- Do you have a credit score that can help you get out of debt faster? There are so many credit score myths out there that refuse to die. I spent a big portion of my career leading teams that built custom credit scores and used generic scores like FICO. I will help de-mystify credit scoring and show you how you can take steps today, even while you are still in debt, to build your score. You do not need to be rich to have a good credit score.
- Can you refinance your debt to a lower interest rate? Getting a lower interest rate can take years off your debt. Marketplace lenders can help cut your rate by 30% or more. With balance transfers, you can get a rate close to 0% for 15 months or longer.
- Should you consider consumer credit counseling or bankruptcy? If you are just too deep into debt, you may have to take more aggressive action. But it should all start with a non-profit consumer credit counselor. I will help you figure out if you should visit a counselor.
With the book, you will be able to build a plan to be debt-free. People have more power, better tools and a louder voice now than ever before. In my book, I will help you use all of the above to get out of debt as fast as possible.
source: forbes.com by Nick Clements