Money Basics Series #3: Managing Credit Card Debt

When Kim graduated from college, her first job paid pretty well. Although she had lived on very little while in college, reliable bi-monthly paychecks changed the game. Kim was “sucked into” the world of credit card debt and entitlement. Debt management was no more than a fleeting thought.

Not knowing better, Kim was lured into a “pre-approved” credit card. Not surprisingly, like her peers, Kim began to spend money before she earned it. 

On the dreaded 15th of the month, Kim glanced at her statements. Seeing the total outstanding balance growing from $450 to $850 to more than $1,200, Kim started to panic. Every month, starting around the 1st, she would have heart palpitations at the thought of receiving the statement. She would find herself obsessing about it at all times of the day and night.

In our society, we face constant stimulation and pressure to buy and buy. We are constantly subjected to advertisements and slogans telling us to enjoy life, take advantage of our youth and live! It is so unbelievably easy to get swept up in the excitement of entitlement and living for the day. Saving? How boring!

Debt is not inherently bad. We often go into debt for large purchases like a car or home. But debt from credit cards can swallow you whole if you don’t exercise caution. Making smart choices starts with understanding how credit works and the questions you need to ask.

How Credit Works

In most cases, credit involves a financial institution agreeing to let you use money you have not yet earned in exchange for repayment with interest. This includes things like auto loans or lines of credit.

The most common type of credit consumers use is a credit card. Unlike a loan with a specific timeframe for repayment, here a financial institution agrees to give you access to a certain amount of money on a revolving basis. We call that amount a “credit limit.”

At the point of sale, this operates much like a debit card. With each purchase, the amount of money available for you to spend gets reduced. 

Each month, you will be asked to repay a portion of the purchases you’ve made. If you pay the full amount you’ve spent, you’re good to go. If you only pay the required portion, interest will continue to accrue, increasing the total amount you pay the financial institution to spend their money.

Timely payments may bolster your credit score by demonstrating your repayment reliability. Late or missed payments, on the other hand, will damage it.

The Pros and Cons of Credit Card Debt

A loved one may have told you at one point to avoid all credit cards. They likely ran into trouble with them at some point in their lives. But are they right?

Credit cards do, however, serve a purpose in some cases. Maintaining a credit card in good standing with regular payments can boost your credit score. They may also prove helpful in case of an emergency. Though we recommend saving enough that such emergencies do not cause significant financial burdens, sometimes life makes that difficult. Credit cards can serve as a bridge.

But cards can also be risky for those who don’t manage their credit card debt responsibly. It’s easy to just swipe a card at the register. Those swipes add up, though. If you’re not in a position to reliably pay the money back, you could find yourself in a precarious position that compromises your ability to access any kind of credit in the future.

Selecting a Credit Card (or not)

If the mere idea of paying a credit card bill makes you queasy, maybe skip this part. But if you’ve decided you’d like to secure a credit card in your name, there are several steps you’ll need to take.

1. Check your credit score.

We’ve discussed why checking your credit score matters in our previous installments. But if you’re looking to get a credit card, knowing your credit score will make clear what your options look like. 

Lots of different types of credit cards exist, and each may appeal for specific reasons. For example, people with a strong credit score will likely have access to credit cards with higher credit limits, lower interest rates, and more robust reward programs. For those with lower credit scores, those cards might be out of reach. Other options, like secured credit cards, may help you build your score to make better cards more accessible.

But find out what your credit score is before you start applying for a card. Each inquiry you make can damage your score.

2. Determine how and why you would use a credit card.

If you want a credit card just because you want to be able to buy more “stuff” than you can currently afford, stop reading. Go back to the top and reconsider your motivations.

You may have other reasons for getting a credit card, though. Maybe it’s a “just in case” option for extraordinary circumstances. Perhaps you want to use it for groceries each month and pay it off to build your credit. If it’s a store where you regularly shop and their card offers special deals, you might sign up and pay off your balance monthly just for those perks.

Whatever the reasoning might be, you should interrogate it before moving forward. If you cannot make a strong case for taking on credit card debt based on how and why it will be used, then now is not the time to pull the trigger.

3. Consider reward program parameters.

Rewards programs frequently receive top billing when it comes to comparing credit cards. Some will offer “points” you can put towards things like plane tickets or hotel stays. Others offer a cashback program in certain purchase categories. 

Which programs provide the greatest benefit depends on your financial habits. For instance, someone who travels a great deal for work might enjoy those airfare miles. Someone using a credit card for basic household expenses might appreciate cashback that helps them keep their principal in check. Take a look at your money journal for guidance on making these comparisons.

Worth noting: your bank may have specific rewards for getting a credit card through them. Don’t hesitate to reach out to your financial institution to find out about available options.

4. Calculate costs.

You didn’t think a bank was going to give you money for free, did you? Each credit card comes with a variety of fees. These may include:

• Annual fees
• Interest charges
• Late payment fees
• Foreign transaction fee
• Balance transfer fees
• Cash advance fees
• Over-the-limit fees
• Returned payment fees

Make no mistake: credit is expensive. Before you take on credit card debt, understand how much you’ll pay for the privilege.

Keeping Your Credit Card Debt in Check

Kim saw that each month she was getting in deeper, yet she wasn’t making any additional money. It was hard to know how she was going to pay off the debt. At night, in bed, she would tell herself, “No more. I am not going to buy lunch out tomorrow. No more going out to dinner with my friends this weekend. Bare essentials only when I go to the grocery store. I can do this. I am going to get this debt paid off!”

Sometimes Kim kept her resolve, and other times she gave in to her “inner devil,” shopping at Lululemon and sabotaging any steps she had taken toward credit card debt management.

If you want to make sure you don’t turn into Kim, there are two important steps you must take.

Delay Gratification

Once you have defined your financial goals, you will find it easier to pass on smaller expenses along the way. For example, if you know that you want to save $500 each month toward your goal, you know that each dollar spent out of pocket on non-essential items and services makes that more difficult. Throw a credit card payment into the mix and those splurges turn even more costly.

The questions you should ask yourself before adding to your credit card debt are quite simple. Perhaps write them on a piece of paper to keep in your wallet. They include:

• Do I need this item to survive, or do I merely want it to feel good in the moment?
• Can I wait 24 to 48 hours to make my decision?

By all means – live your life. But live with rules designed to protect you and your financial health. You can have a full and rewarding life without spending every penny you earn as soon as you earn it. It takes work, but if you are willing to sacrifice and strive, you will accumulate long-term benefits – not just “stuff.”

Scrutinize Your Choices

It’s easy to say you’ll use your credit card responsibly. But it’s even easier to ignore the rules you’ve set for yourself. You must hold yourself accountable if you plan on effectively managing credit card debt.

During your weekly financial check-in, pay special attention to how you have used your credit card and the results of your decisions. Ask yourself:

• Did you spend more than you intended? 
• Did you use the card for purchases beyond the boundaries you set for yourself?
• What will your purchases do to your next minimum payment?

Consider how much you have paid for the privilege of those purchases in terms of interest. Sometimes looking at those figures will put the savings from a sale in a far less favorable light.

Statements: Your Best Friend in Managing Credit Card Debt

Shortly before I met her, Kim’s latest tactic to deal with her credit card debt came in the way of automatic payments through her checking account. I was happy that Kim had taken that step (no more late fees to pay or damage to her credit score for missing payments). 

But Kim’s comfort in knowing payment would be made directly from her account gave her a false sense of security. She believed that she no longer had to suffer through opening and looking at her credit card statements. Wrong!

Credit Card Statement Reviews to the Rescue

Credit card errors pop up all the time. No one – and I mean no one – will worry about the accuracy of your bills but you. You may occasionally get a call from your credit card company because its screeners had flagged a blatantly obvious fraud. But generally speaking, you have the best visibility here. If you aren’t examining your credit card statements, you are likely giving away your hard-earned money.

Do you find comfort in “knowing” that you are only responsible for $50, the maximum exposure under most credit card agreements, for unauthorized charges? Well, that only “works” if you notify the credit card issuer of your dispute within 60 days of receiving the erroneous statement. If you don’t make the complaint, you lose. Period.

Five simple steps could save you literally thousands of dollars:

1. Open and read your statements. Line by line.
2. If you see an error, immediately dispute it by calling customer service (the number is on the card and the statement). Be specific about the charge, including date and amount at issue.
3. Follow up in writing (and keep a copy).
4. Pay the outstanding, undisputed charges on time (at least the minimum amount). You cannot be charged for the disputed amount, nor can interest accrue on it, while the matter is under investigation. The credit card company has one month to acknowledge your dispute and two billing cycles to make a determination.
5. Make sure to read your next statement, which should have an acknowledgment of the dispute. Once the credit card company makes a decision, you will receive notice as to how much you owe, the date the final payment is due, and when interest charges will begin to accrue.

Credit Where Credit is Due

Credit is not cash. Your available credit is not your money. Credit comes at a hefty cost. The banks know it, the bankers know it, and now you know it, too.

If you’re going to take on credit card debt, do so responsibly. Know what you’ve signed up for and why. Pick a card that makes sense for your needs. Set rules and make a credit card debt management plan – and follow them. 

But your best bet is to grow the money you already have. Budget, save, and invest instead of getting caught in the “prison” of debt. 

Check Out the Rest of Our Money Basics Series:

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This is an updated version of an article from 2020. ©2023. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.