According to statistics drawn from the Federal Reserve and other government sources, the average American family has about $7,281 in credit card debt. However, there are many households that do not have credit card debt. If we filter out those, the average credit card debt among families that are in debt is $15,607!
So how does this happen?
I suspect most people don’t intentionally go out and charge $15,000 in credit card debt. It just kind of happens over a period of years.
Perhaps, we decide we’ll just keep the card around for emergencies. But then life happens. A car repair here. An unexpected medical expense. That shower gift we had to buy for our friend because we forgot the party was this weekend. Then there were a few times that we worked late and didn’t feel like cooking so really how much can a pizza here or there add up to. And on and on until one day we realize the payments are getting out of control.
Or perhaps we get a card so we can take advantage of the rewards. We intend to pay it off every month anyway. And we do for a few months. We think we are beating the system. Then a month comes when we had some unexpected expenses and we can’t quite pay that card off. But we promise we’ll catch up next month. Except something else happens next month too. And month by month we slip further and further behind. We didn’t intend to end up with $15,000 in debt, it just kind of happened.
The real hidden danger of credit card debt
The real problem with credit cards is they can mask the issues that lead us down the path toward financial danger. The biggest of these is spending more than we make. It is impossible to get ahead financially if you consistently spend more than you bring in.
But here’s the thing. If I am using cash, I don’t have the option of spending $1,200 if I only have 10 uncle Benjamin’s to work with. When my wallet is empty, it is empty.
Or suppose I write checks. I can certainly write $1,200 worth of checks when I only have $1,000 in my account. But some of those checks are going to bounce, and I’ll figure out pretty quickly that I am spending more than I have.
But when I use credit cards that safety stop isn’t there. As long as I don’t surpass my credit limit I can continue to charge as much as I want.
Credit cards allow us to spend without the immediate feedback of the consequences. I spend $200 extra, but I don’t have to deal with that today. I don’t see a bill until next month and then it’s probably only $20. I can handle that. And so I finance our overspending a few dollars at a time until one day I wake up and realize I have thousands of dollars of credit card debt, and I can no longer make the payments.
So how do you avoid the slow trap of credit?
First, you need to have a budget. A budget need not be complicated. It is simply spending purposely, on paper, your monthly income before the month begins. If I make $4,000 this month, then I can’t spend more than $4,000. By committing it to paper, I have the opportunity to make sure I am spending it on what matters most to me and that I am not spending more than I have.
Second you need to have an emergency fund. Things break. Jr. falls and breaks his arm. We get in an accident on the way to work. The boss tells you that he’s sorry but the company isn’t doing well and your services are no longer needed. Life happens. And usually it happens at the most inopportune times. Without an emergency fund of at least 3-6 months of expenses, you will have little choice but to turn to your plastic when those emergencies hit.
Use cash for your everyday expenses. The envelope system is a great way to keep your spending under control. The beauty of cash is that when it is gone you have no choice but to stop spending. You can’t “cash” yourself into debt.