I remember my first ever credit card. I was 21 and for some reason I decided that having an emergency cash stash would be a good idea.
Somebody else’s cash mind you. The credit limit was $500 so there was no way I could do much damage with it.
Looking back, the signs of a messed up relationship with money were evident with that first credit card. I remember one day I had a work function to go to and I just didn’t have anything to wear (so I thought) so I went to the first shop I could find and spent about $370 on clothes. I didn’t just buy one piece of clothing or one outfit, I bought everything I could find.
Unfortunately, the taste of other people’s money and how easy it was to have new stuff straight away was just too much and I just spent and spent and spent. The credit card became my play money when I’d run out at the end of the week. Instead of saying “no I don’t have the money to go to the movies today” my answer was always:
YES! Let’s go to Gold Class and grab dinner too! – SWIPE.
Back in those days, banks were able to continuously offer you increases in your credit card limit without you having to agree to it. So whenever they offered more credit, I took it.
Leaving home was when the credit card spending really took flight
After I’d left home, moved interstate, got a full time job and bought a house, the spending really took off. I had 2 credit cards, with a total credit limit of $14,000 and I was constantly out buying stuff for the house. Even in Alice Springs where there is almost nowhere to buy anything, I managed to spend lots of money.
I clearly recognised an issue with this as at some point, as I ordered a third credit card from a different bank which had a 0% interest rate on all balance transfers. Great, I’d be able to pay down some of this credit card debt (at that point about $6,000). The new credit card had a $9,000 limit.
I did the balance transfer and was very proud of myself but I didn’t actually close the accounts of the other cards. I didn’t cut those cards into a million pieces and kiss them goodbye. I kept them for “emergencies.” HAHA. My definition of emergency was pretty iffy.
By the time I left Alice Springs, I had $22,000 in credit card debt. I’d sold my house for a great profit and had enough to pay out the cards, buy a new car (another story for another day) and still have enough money left over to make a good start on another house deposit.
I got rid of the credit card debt, in full
I paid out the $22,000 and then started using the cards again. Ferociously. I didn’t just buy the odd thing, I went completely overboard. I’d moved to Darwin and all of a sudden I had more shops to buy things from. I went on holiday with a friend of mine to Sydney and booked my flights on the card. BUSINESS CLASS. I spent $5,000 on business class seats for a 4 hour flight. Why? Because I could.
I had this other great maths trick too where if I spent say $180 on something, in my head I would just add up the first digits, so I’d count that as $100. On some shopping sprees where I thought I’d spent $400 for the day, I’d actually spent closer to $700. I’m so creative when I need to be!
I continued to add to my ever-increasing debt and eventually the worst possible situation arose. A recruitment freeze across the public sector meant I would soon be out of a job. How the hell was I going to deal with that?
I confided in a friend that I was in trouble and he urged me to find out the exact amount of my debt, get a personal loan and consolidate the debt. He would then supervise me as I cut up the credit cards and closed the accounts.
It was time to properly acknowledge the damage
The exact amount, over 3 credit cards, was just short of $30,000, with interest rates varying from 11% to 17%. If I actually made repayments, they were completely eaten up by interest almost immediately – they made no dent in the debt. Worse than that was my complete inability to identify what about 95% of the transactions actually were. I had zero idea. In fact, when I saw the $5,000 for Qantas I didn’t actually believe that I had done it. How’s that for denial.
I must have applied with 5 or 6 different banks for a debt consolidation loan and they all rejected me. That’s when I really started to panic. Eventually a bank came to my rescue and I did what I promised. I cut the cards up. (I still have the pieces cable tied together as a reminder.)
I settled into my repayments and began to learn how to live without a credit card. It was hard. There were weeks where I literally lived on $50 for 10 days because I had blown all my dough and didn’t have any back up (it’s amazing what you can do when you have to!). At the same time, I’d taken a pay cut to stave off unemployment for a few more months so finances were a lot tighter than anticipated. It was not an ideal time to be fixing such a mess but in all honesty, it was probably the only time I ever really understood the gravity of the mess I’d made.
When unemployment did eventually come, I faithfully paid my personal loan repayment every fortnight. Aside from my rent, it was the one bill I always paid on time. I was not about to make my credit rating any worse.
I’m at a point now where I’ve paid down a third of the personal loan (I’ve actually paid a lot more than that but you know interest rates) and I hope to knock it out completely within 18 months. That is going to take some sacrifice (OK a lot of sacrifice) but it’ll be worth it to have $300 a fortnight back in my pocket!
So what did I learn about credit cards that you need to know?
- Stop thinking the money is yours. It ain’t. It’s not savings, it’s not extra money, it’s another bill just waiting to happen.
- Write a list of what you will use your credit card for (eg emergency medical, unexpected car trouble) and don’t deviate. Don’t give yourself the OK to just buy whatever you want whenever you want. It’s a dangerous precedent.
- Work out what it actually costs you to use credit. Depending on your interest rate and how vigilant you are with your repayments, you could be repaying $2 or more for every $1 you spend.
- Do a balance transfer (and pay 0% interest for as many months as possible) but remember to cut up your old credit cards and cancel them straight after.
- Never have a credit limit higher than what you can realistically repay in 1-2 months.
- When you pay off a chunk on your credit card, lower the credit limit so you can’t re-spend what you’ve paid off.
- Always open the statements. Not only do you need to check that the transactions are accurate (identity theft, overcharging etc) but you need to know what you are spending.
- Don’t leave it too late to do something about credit card debt that is out of control. The longer you leave it, the worse it’ll be.
- Tell your friends and family that you are re-assessing your budget and need to say no sometimes. You may find others in the same situation (it’s more common than you think).
- Suggest free/cheap things to do when you get together with friends and family – it’s about the time you spend together, not the amount of money you spend.
Do you have a similar story?
It would be great if you shared it with me below.