What to do with your credit card debt

Before I started keeping track of my finances, I had more than student loan debt: I owed $10,000 on a line of credit and regularly carried balances of a few hundred dollars on my credit card. I just didn’t think much of paying $20 or $30 in interest — it seemed a reasonable “fee” to buy whatever I wanted. If I missed a payment or two, I didn’t sweat it. I didn’t know what a credit score was, let alone why I had to worry about it. Oh, the blissful ignorance of being 22!

When I finally decided to get my financial house in order, it wasn’t a quick fix. You can’t eliminate hundreds or thousands of dollars in debt that took you months (or years!) to rack up in a short while. I took the following steps to kill my small credit card debt before tackling my student loans:

1) Stop using the cards. If you want to get debt free, you can’t keep racking things up on plastic. Whether you need to cut up your cards, freeze them in ice, or bury them in your sock drawer (all tactics I have used to varying levels of success), YOU HAVE TO STOP SPENDING. Adopt a cash-only budget and keep your cards out of your wallet so your debt doesn’t increase.

2) Never miss a payment. If you’re erratic with your bills, now is the time to get on track. For over 5 years now I’ve always had my minimum payment to come out of my bank account automatically. My balance is usually zero so this never gets used, but it’s there so my credit score is never at risk.

3) Pay more than the minimum. All those calculators will tell you it will take 92 years or whatever to pay off your debt if you only make the minimum payment, so you have to pay more. Because I’m an OCD weirdo I kept an itemized list from my credit card statements of purchases I still “owed”. Sweaters, Starbucks coffees, beers out with friends — even though these were $16 or $32 or other random dollar charges, those are the payments I made. If I had an extra $2.35 lying around, I transferred it to my credit card and crossed off a grande Americano from my list of debts. It might be crazy, but I found visualizing where the money had went made me hate it less.

Thankfully, there’s benefits to managing your debt more effectively, even if you can’t pay it all of right away. Making regular payments against your debt to decrease the balance will have an immediate positive effect on your credit score.

You should keep an Eye on Your Credit Score. There are lots of factors that can affect your score. If you apply for credit too often, you can appear to the Credit Reporting Agencies like you may be setting yourself up for financial trouble. This will lower your score and raise interest rates for all loans you get in the future. If you acquire credit cards only rarely and eliminate ones you don’t need, this will help you. But when your striving for debt-free and cutting up your cards, keep the oldest one. The older your accounts with a long history of regular payments, the better for your score.

Another factor is how much of your available credit you are using. The rule of thumb is to use no more than 30% of the limit of any one card. When you have over 30% of the balance charged to the card, you start to appear to be a bigger credit risk. If you’re focused on boosting your score, when you’re targeting your debt you can focus on eliminating cards that have exceeded this 30% mark. Another option is to consolidate your balances onto your lowest interest card, or a low interest line of credit. Not only will this bring what you owe below 30% on most of your cards, you will only have to pay one bill to keep bringing your debt down instead of multiple. Getting to debt free is a slow and steady process, but it’s worthwhile to make it as painless as possible.

Credit Card debt is nasty and nobody likes it. But there is a way out and important factors to consider while you are fighting your way out. Get your finances laid out using online invoicing software or some other finance visualizer. It’ll help you make a strategy to get to debt free.

When Money Gets Old, Distract Yourself

For the past couple of years, I’ve lived and breathed personal finance. Updating my net worth spreadsheet was, at one point, a daily habit. I read copious amounts of PF blogs every day. I spent hours and hours of time trying to optimize my spending and debt payoff…and weirdly enjoyed it.

Well, the time has come where the novelty has finally started to wear off. I’m more concerned with living my life than tracking my pennies and I only read a handful of blogs with any regularity these days. There’s only one problem — my debt isn’t gone yet. This is not the time for complacency and indifference. If there was ever a time I needed motivation to keep chugging along, this is it.

But sometimes the motivation just isn’t there. So I’ve decided to try the next best thing — distraction.

In an attempt to stay on the path of frugality and debt payoff, I’m trying to distract myself from spending wildly. If you are having the same problem, you should join me. Because even when money gets old, you still have to deal with it.

When optimizing your dollars is not a priority and all you want to do is spend aimlessly like a normal person, try doing the following instead:

  • Get addicted to a new show on Netflix I’m currently watching Breaking Bad for the first time and it is a great way to kill hours of time at night while still enjoying myself

  • Read You know, books? They are still just as awesome as when you were a kid. Start a Goodreads account, and before you know it you’ll have a “To Read” list that will certainly outlive your debt.

  • Clean your house It’s probably full of clutter and dust. Clean that shit up and sell stuff you don’t need. Not only will you not spend, you’ll also make money!

  • Find free stuff to do in your city It’s summertime, which means there are approximately 101 free or cheap things to do in your city or the nearest large city this weekend. Take advantage of those!

  • Have sex Fun AND free (hopefully!).

  • Pick up a hobby Write, run, draw, paint, sing, whittle, craft, cook, knit, hike, swim, people watch, whatever! Pick something fun and cheap you can do regularly.

Whatever you choose to do, make sure it is something you enjoy. Then, when you get bored with that, move on to something else (maybe I just get bored easily?). The point is to keep yourself from spending so you can reach your financial goals, even when the words “personal finance” make you feel ill.

There actually are people in the world who don’t particularly care about finances, but also have their money straight. These people are assholes*. For those of us without their insane mix of disinterest AND willpower, distraction is key. Distract yourself from spending when the “excitement” of spreadsheets and free budgeting tools wears off.

How do you cope when you are sick of thinking about money? Do you have a trick for avoiding overspending during this time?

*They probably aren’t, but they might be.

Financing My Life Has Never Been a Good Idea

I have financed a lot in my almost 7 years as an adult (shit, I’m old!).

Between cars, clothes, furniture, food, and random crap no one has ever needed, I have basically paid interest on everything I possibly could.

And I’ve learned something from this…

It was never a good idea.

No seriously, NEVER.

While I don’t allow myself to regret past decisions (because I have no desire to butterfly-effect everything), I can definitely look back with a look of confusion on my face. Really, past Erin, why did you ever think you needed that? More than that, why did you think it was important enough to pay interest on it?

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Let’s start with possibly the dumbest thing I’ve ever financed — furniture. “Deserving” an upgrade, I put $3,500 worth of furniture on credit. Don’t worry though, I was totally going to use it for years to come…

Exactly 12 months later, I packed my entire life into my Ford Focus and moved from Cleveland, Ohio to Portland, Oregon. While the furniture didn’t come with me, the debt certainly did. Now, ironically enough, I live in an apartment without furniture. One, because I would rather spend my money on other things, and two, because I refuse to finance it ever again. #maturity

By the way, that Ford Focus was also financed and is currently upside down (as of 12/31/2013).

With any luck, by the time this post goes up, I will be carless — only owing the difference between the loan and the value of the vehicle.

Now, I don’t actually believe financing a vehicle is always stupid. People who qualify for super low interest rates will benefit from financing, provided they are making more investing their money than they are paying to finance. But our situation was stupid because (a) we didn’t put down any type of down payment and (b) we bought too new of a car while in debt (2012).

Unlike the majority of people, we actually financed the opening of a business. Seriously, there was no cash involved whatsoever — just credit cards with 20%+ interest rates. We shut the business down and didn’t get the resulting debt paid off until over a year later.

Other than that, I’ve financed countless other things, from dinners out to spray paint to decor. All of it unnecessary, all of it stupid.

For the love of god, learn from my stupidity.

Almost anything you’ll be tempted to go into debt for is ridiculously dumb. Provided you can pay your basic bills, the only thing you may ever have to go into debt for is college, the purchase of a home, maybe the purchase of a vehicle, and possibly a large medical expense. Nothing else is important enough to pay interest on. Trust me, I’ve done the legwork.

What is the dumbest thing you’ve ever financed? What do you consider to be permissible debt?

Should parents pay for their kids’ tuition?

The PF blogosphere is made up of all different types of people. I mean, we’re all total nerds, but we all have semi-unique backgrounds and experiences.

In regards to college, there are bloggers whose parents paid for their entire tuition and others whose parents just helped cover costs.

And then others, like myself, whose parents did not pay any of our tuition.

To get this out of the way first, I don’t believe parents should be obligated to pay for or even help with tuition. Would it be nice? Sure. But the majority of people enter college at the age of 18. This is adulthood. Therefore, your parents are no longer legally obligated to cover any of your expenses. More than that, I don’t think they are morally obligated.

While my parents didn’t pay for my tuition*, I didn’t take this to mean they loved me less or cared less about my future.

I am not mad at them for my student loan debt because it’s really not their problem.

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They chose not to contribute, maybe because of financial strains or maybe because of other priorities, but either way, I hold no resentment. I am glad to have this indebted experience. It brought me to where I am today.

Because of my personal experience, I often think about whether or not I will help my children out with tuition. I could either go the “I didn’t get help, they don’t need it” route, or the “I don’t want my kids to deal with crippling debt” route. I’ll probably end up somewhere in the middle.

I like the idea of helping my children out with tuition, provided they are excelling in school. I am also of the opinion every single undergrad student should work at least 20 hours a week**. College should not be a postponement of adulthood.

In my ideal situation, I suppose I would pay for any classes in which my children received an A or a B and expect them to cover entertainment and living expenses on their own. What I want to know is what YOU plan on doing with your kids.

Here’s what I’m wondering:

#1. Was your tuition completely or partially paid for by your parents?

#2. How much would you be willing to contribute to your children’s college education?

#3. Did your own experience of paying or not paying for your own tuition affect your decision to pay or not pay for your kids’ tuition?

I am very curious to see whether people are following in their parents’ footsteps or doing the opposite. Comment below!

*Credit where credit is due. My father gifted me 4 years of textbooks as my high school graduation gift and my mom paid for my cell phone and car insurance until the age of 19.

**With two exceptions — students who are on music or athletic scholarships, assuming they have practice during the hours they would be working.

Debtors Just Wanna Have Fun!

There is a school of thought that seems to think the indebted should suffer through a life of deprivation until they pay off every dime of their debt.

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I have a theory about the people who fall into this mindset:

Number 1: Either they’ve never been in debt or they weren’t in debt for more than 6 months to a year.

Number 2: They are masochistic and/or sadistic.

Being in debt is not a reason to be punished. Okay, so we made mistakes, who hasn’t? It doesn’t mean we have to deprive ourselves of any joy that happens to cost money until our debt is gone. Because guess what, guys? Many of life’s little joys DO cost money!

Sure you could resign yourself to a life of free fun, which would probably include walking around parks, checking out books from the library, and having sex. All these things are great and totally fun! But if you are anything like me, you also enjoy activities that aren’t free — travel, eating out, festivals, movies, whatever.

Here’s the deal: when you are in debt and you choose not to throw every extra dime at your debt load, you are accepting you may incur extra interest. This is a choice you are making. If you accept it, then it’s fine.

At the same time, you don’t want to spend so much you are unable to pay off your debt. Spending everything you make will keep you in debt until the end of time. If you don’t want that, you DO need to make debt payments, probably more than the minimum.

There are a few ways to strike a good balance between financial responsibility and fun money:

1) Percentages. Assign percentages of your “disposable income” to debt and fun. Subtract your necessary expenses from your take home income and assign percentage values for the leftover cash. Like 75% to debt and 25% to fun. Or any other realistic percentage combination you come up with.

This is a great method for those with a variable income, because it is great motivation to hustle. The more you work, the more you play.

2) Numbers. Give yourself a flat number for fun and entertainment each month. If you happen to bring in more cash than usual, the surplus will go towards your debt.

This is a great method for those learning to operate within a budget. You have a finite amount of money, so you have to prioritize what is truly important to you in the fun department. And after a few months of spending all your fun money in the first five days, you’ll learn to ration your cash.

3) Financial sources. As a freelancer, sometimes I assign money to debt, savings, or fun based on where it is coming from. For example, I may throw all the money from a one-off gig towards my debt. Or I may assign cash from a certain client towards entertainment.

The same concept applies for windfalls. Maybe you throw your tax refund at debt but you use any gift money for entertainment.

Being in debt does not mean you have to deprive yourself of fun, even PAID fun. It is easy enough to say, “I’m putting all extra cash towards debt! Gazelle intensity! Rice and beans!”, but it isn’t sustainable for most people for a long period of time. Don’t neglect your debt OR your social life.

Do you think the indebted should be “allowed” to have fun? If not, how much debt have you paid off and how long did it take? Would you classify yourself as a masochist/sadist?