Why is it that reasonably intelligent people become idiots when it comes to using plastic for purchases? How can spending money you haven’t yet earned – putting money on a credit card and carrying a balance – ever be a good idea? And yet, thousands of Canadians do it every month. They head out to a store, buy something using their credit card, bring that something home and walk around with the purchase on their credit card for months, even years.
If you’re carrying a balance on your credit card, you either are as dumb as a sack of hammers or you have no self-control. If you’re dumb, do you want to stay dumb forever?
Okay then, time to get real. There’s no magic to getting out of debt. It requires that you make a plan and follow through.
Step 1: Divide the balance you owe on your credit card by the number of months in which you wish to have the loan paid off. So if you want to pay off that $3,100 balance in 5 months, you’d come up with 3100 ÷ 5 = 620.
Step 2: Figure out your monthly interest cost. So if your $3,100 is at 19.99% your monthly interest would be 3100 x 19.99 ÷ 100 ÷ 12 = 51.64. (Remember that the longer you take to pay off the balance, the more you’ll end up paying in interest.)
Step 3: Add those two numbers together: 620 + 51.64 = 671.54. You would have to make a monthly payment of $671.54 to achieve your goal.
If you think that payment is too steep, extend the time for repayment, as long as you don’t wuss out and make it “easy” on yourself. It shouldn’t be easy. You want to remember this pain so you don’t make this mistake again!
If you have no self-control, stop using your plastic and only shop with cash. You’ve seen me cut up people’s credit cards. Hey, if you’re unable to control your impulses, cutting up your card is a sure way to stop your impulsive shopping. If you’ve registered your credit card with a bunch of sites for easy shopping, you’ll have to take the additional step of reporting that card lost so you’re issued a new number. When the card arrives, do not activate it: cut it up! (Keep the account open so you keep the credit record.)
Studies have shown that our buying decisions play out in our brains as a fight between a pleasure center seeking the bliss of acquisition and an aversion center seeking to avoid the pain of paying. When we pay with plastic, we subdue the “pain,” and so the “pleasure” wins. But if we have to dole out cold, hard cash, we are much more likely to think twice before plunking down our pennies.
Studies have also shown that shopping can lead to more shopping. Buying that fateful first item opens the shopping floodgates. But when you must open two separate wallets, envelopes or other containers for your money, you’re more likely to think twice before jumping on the shopping bandwagon.
If you’ve got an impulse control problem, the next time you go shopping:
- Make a list of what you’re going to buy.
- Put the money for each item in a separate envelope or wallet.
Folks who limit their access to credit of any kind are often less willing to drop gobs of their hard earned money on rubbish, particularly if that means shorting their rent or mortgage payment. Those who use credit to defer feeling the pain of payment – hey that minimum payment is only $10 – can justify spending money they don’t have on that shiny new sumthin’ or ‘nother.
Credit cards themselves aren’t evil. They are tools. But the people who misuse their credit cards don’t have the discipline to use that tool to their advantage and end up hurting themselves. If you are one of those people, shelve your plastic and live on cash. It’ll put you back in touch with the fact that money is an exhaustible resource. And it’ll make you think hard about your priorities whenever the consumption itch strikes. After all, if you can have that nice-and-shiny or feed your family, the choice becomes much clearer, doesn’t it?