debt

The Truth About Credit Card Debt

7 Minute Read

There is no good reason to have a credit card.

There. We said it.

If you’ve listened to Dave talk for more than 60 seconds, you know exactly how he feels about credit card debt. But do you really know why?

Despite what commercials, celebrity spokespeople and the Joneses next door will tell you—responsible use of a credit card really doesn’t exist. Don’t believe us? The Federal Reserve has found that Americans are approaching $1 trillion in credit card debt.(1) The numbers don’t lie. Credit card debt is a major problem in America.

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How Much Is That Credit Card Debt Costing You?

We’ve heard it before. "I can pay my credit card off each month. So what’s the big deal?"

There is no positive side to credit card use. Even by paying the bill on time, you’re not beating the system. The reality is: The average family today carries a balance of $16,048 in credit card debt.(2)

Think about it for a second. When you open a credit card account, you’re likely to pay thousands of dollars in interest over the years as you carry a balance. Even if you promise to pay it off every month, all it takes is one lost or missed payment. If that happens, your interest rate skyrockets, you get slapped with fees and it dings your credit. Either way, you've gotten yourself into a big money mess.

The Truth About Airline Miles, Cash Back and Rewards

Airline Miles

Oh, those airline miles. People love airline miles. This is one of the most common reasons people give for hanging onto their credit card. Let’s say your card offers airline miles and has an $80 annual fee. If you spend $8,000 on the card every year and pay it off each month, you'll have accumulated enough to get the free ticket in three years. The only problem? You'll have spent $240 in annual fees alone—and you can buy a plane ticket outright for $250.

Cash Back

We like cash around here, but this is one instance where we don’t recommend it. You have to spend thousands on a credit card to get a measly $100 cash back. Oh, and it’s probably just a credit applied to your account anyway, not actual cash in your pocket. And it might be just enough to cover your annual fee. How about you keep your cash instead?

Rewards

Now let’s talk about the rewards. Plenty of people hang on to credit cards for the sole purpose of using the rewards or coupons they get. This is especially true of store credit cards. Sure, you might get free shipping twice a year or a 15% off coupon every other month—but is it really saving you money? Think about it. You’re so excited to save 15% percent you spend $150 in a shopping frenzy. That 15% you "saved" goes out the window when you tack on interest—especially if you don’t pay off the balance. Your "reward" wasn’t really a reward at all.

The Truth About FICO Scores

Are you obsessed with your credit score? You’re not alone. Our culture has reached the point where we pretty much idolize the almighty credit score. Why? Because we think it somehow proclaims to the world how good we are at managing our finances. In reality, all it does is show how much you love debt. Step away from the credit score, people. It’s okay, you can live without it.

Myth #1: "A good credit score shows my ability to manage money and build wealth."

As you pay down your debts, you may start to notice your credit score inch up. But as satisfying as it is to make headway on your debts, a high FICO score does not mean you’re wealthy. Your FICO score only measures your debt—how much you have, how much you use, and how often you pay it back. You’ll never build wealth that way.

Myth #2: "I need a credit score to buy a house."

This is one of the biggest myths of all. You can buy a house without having a credit score, but you have to find a mortgage company that does "manual underwriting." This means they will make a judgement call about you based on the details of your actual life rather than simply relying on a few numbers. They’ll be looking for things like a strong history of paying your rent and utilities on time and a solid history of being employed.

The Truth About Shopping Online With a Credit Card

It seems like you’ve spent years typing those 16 digits, security codes and expiration dates into every shopping portal on the internet. Finally, everyone from Apple to Zappos has your information "securely" stored. And it’s so easy to pay (and buy, buy, buy) with the click of a button.

You’ve told yourself paying with a credit card online is safer, so that’s a “good enough” reason to keep the card. But did you know a debit card offers the exact same fraud protection as a credit card? There’s really no excuse not to use it. Just remember to always check your budget first, and sleep on big purchases before you buy. Things have a funny way of looking less tempting in the morning.

The Truth About Cash vs. Credit Cards

You will spend more if you use credit cards. When you pay cash, you can feel the money leaving your hand. This is not true with credit cards. Flipping a credit card up on a counter does nothing to you emotionally.

But if you miss the convenience factor of a card, use a debit card. It works just like cash. Simple as that.

Credit Card Debt Relief Starts Here!

Are you starting to rethink the precious plastic you’ve been carrying around in your pocket? Start chipping away at your credit card debt today! First, stop using your credit cards. In fact, cut them up! Get rid of them! Then list all your debts from lowest balance to highest balance. Pay the minimum payment on all your debts except for the lowest balance. Attack that one quickly and with a vengeance. Throw any extra money you can find at it! Once you have that one paid off, apply the amount you were paying toward it to the minimum on the next balance. We call this the debt snowball method. As you apply this process, you’ll feel small wins as you knock out the smallest debts first. This momentum will carry you through as you pay off the remaining debts on the list.

Download the debt snowball form FREE from Financial Peace University (plus a form to help you list—and cut up—those credit cards!)

Remember, personal finance is 80% behavior. Change your behavior and you’ll change your life! You need to cut out habits that make you overspend and cause you to reach for a credit card. You’ll never build wealth by using credit cards. Don’t get suckered into playing a multibillion-dollar industry’s game and think you’re going to win.

You can conquer your credit card debt and take control of your money once and for all. Almost 5 million people have found success with Dave’s most popular money class, Financial Peace University. Ready for your financial turnaround? Learn more!

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