When we're first introduced to the credit card, it's like cinnamon toast. Instantly one can purchase almost anything. The drawbacks are small; the minimum payment is minuscule. Life is good. It’s very easy to lapse quickly into a life style beyond our means, and by the time we realize what’s happened we are over our head in debt. As soon as there’s a problem with a payment, the interest on the benign little convenience soars from 7% to 30%; the monthly minimum payment mushrooms.
First, realize that you're facing internal programming that has been thrust upon us for over fifty years. We live in a commercial culture, immersed in advertising. For those of us weaned on television, this has a profound effect on the way we think. (See Marshal McLuhan, Understanding Media). Hence, many of us live with a drive to consume. For some it's a tonic, even a "deity"; for others it's status in society, or a palliative for depression. Along with the slick ads urging us to consume, we see ads from credit card companies reminding us that we don't need money to purchase what we want---just charge it.
Resolution of this dilemma lies within yourself. A loan company, promising to lower your monthly payments through a debt-consolidation is enticing you to borrow more! The loan officer’s mind is on a commission he’ll make by selling you additional debt! Don’t look for the solution where you found the problem unless you are offered a substantially reduced interest rate on the debt or a program of debt relief. If you have credit problems it’s unlikely that you’ll be presented with such an attractive package. If they claim they can get your debt “excused”, examine carefully the qualifications, consequences and their fees. My plan is free, and you will take charge of your life.
Five hundred years ago, charging interest for loans, usury, was illegal, even punishable by death. Now our economy has evolved to the point that debt is our standard. Our government spends beyond its means. During slow economic times, some presidents even tell us that spending is “patriotic”. This is idiocy. We now have 50 million families in the United States that are at least partially buried in credit card debt.
In an evening's television you’ll see sixty products that we must have (to be sexy, popular, up to date or just cool) and at least a handful of credit card ads telling us that we can have everything we want immediately. Even if you watch DVD movies, they come laden with commercials, now embedded into the content. All of these forces are massed to impel you to consume!
Take careful note: If you can’t afford to buy something with cash, you can’t afford to buy it with a credit card!! You really need to believe this! A credit card is a convenience item---a substitute for cash, not a replacement. If you use it to buy things you can’t afford, you will end up paying much more, perhaps two or three times the price for these items through compounded interest, concealed by a low monthly minimum. If you can't afford the item, how can you afford the massive amount of interest you'll eventually pay? Do not fall prey to this scheme!
What the banks fail to disclose, is that with your $25/month minimum payment, it’ll take about thirty years to pay off a $2000 debt---if you never charge anything else! At that rate, you’ll pay $8000 for your purchase, which will have become obsolete 25 years ago.
It's more insidious than that. Bankers have access to information that allows them to assess your income and budget profiles. You can make all of your payments promptly, and still be within their scrutiny and over the edge. If your banker sees an expense/income profile that indicates you're beyond your means, essentially living off of credit cards, you are tagged regardless of your payment history. When you become identified as a risk, your interest rate will soar from 8% to 30%, and your credit limit can be reduced below your outstanding balance. This immediately produces penalty payments, as well as a tripling of interest charges. For a family in financial distress, this is crippling. The bank is trying to get as much out of you as they can before you go down---you have essentially been written off. Again: CREDIT CARDS MUST BE USED AS A CONVENIENCE ONLY; DO NOT USE THEM TO BUY THINGS YOU CAN'T AFFORD.
So how do we get out of this mess?
The fact that your monthly minimum payment won’t pay off the debt for 30 years is not apparent. Legislation is periodically introduced that would require the banks to disclose this on our monthly bill. Invariably this measure is supported by one of our political parties and opposed by the other. The bankers’ lobby has enough influence with the opposing party to prevent this disclosure. Banks want us in over our heads, that’s why they send out so many cards, and with high credit limits. They “bank” on the likelihood that your early payments will cover the possibility that you'll later default. Once you miss a payment, your interest rate skyrockets, your finances, your future financial viability is in trouble. The bankers are rubbing their hands with glee; you’re snared. You’ve been bamboozled by the bankers.
If we all used credit cards wisely, they wouldn’t exist in their present form because the banks would be losing lots of money. The key is to remove yourself from the group of consumers who pay the banks and join the ranks of those who reap the benefits paid for by the other group.
Recovering from credit card debt looks like a diet: You’re over-weight (over budget), right? You find a diet which offers a plan to lose weight; but the key is to keep the weight off after you lose it! After quitting a diet most people put the weight back on---they get on the roller coaster of weight reduction/gain, jeopardizing their health. Rather than getting on board with a weird diet, we all know the only real way to lose weight and keep it off is to adopt sensible eating habits that will allow gradual weight loss, then continue that “diet” for the rest of your life. This doesn’t sound very attractive.
Good news! Credit card debt is not like that. Picture a diet plan that will allow you to lose excess weight, then when the weight is off you may return to your old eating habits---in fact, you may eat more of the stuff you like while retaining your new, trim shape. This is the reality of credit card debt!
We all know that the banks charge interest for their outstanding loans on the cards; but there's an additional charge, a hidden "tax". The credit card tax is the same as a consumption or sales tax. At the grocery store, for instance, on taxable items you pay sales tax on the spot. But you pay the credit card tax on ALL items, including the sales tax, credit card or cash! Nothing is sheltered. If you have credit card debt, even if you pay with cash you’re using borrowed money to make your purchases. You pay tax on every purchase. If you’re struggling with this debt, you’re probably paying from 22 to 30% or more for this tax. It's hidden because the store clerk doesn’t collect it; the bank collects it from you indirectly. Unlike sales tax, however, payment of credit card tax is voluntary.
If you buy a $100 jacket, for which you think you’re paying $107.50 with sales tax, actually you may be paying $127.50 or more with your credit card tax. Again, you pay this whether you use plastic or cash. Think of a credit card as either a mule or a yoke. The credit card is like a pack mule, following you around and carrying your purchasing power. If you allow yourself to get behind in debt, however, the mule disappears and in its place you are presented with a yoke. You shoulder the yoke and begin to drag the load on a sledge, no wheels. To make progress against credit card debt, you must see your credit cards in this manner.
The Plan
First, realize that your purchases incur this additional tax. I will explain how to calculate your credit card tax in the index. The rate of this voluntary tax on all purchases is commensurate with your debt burden. I hope that you now have some incentive to reduce the purchases which are being taxed so heavily. You need to go on a spending diet. Keep in mind that (unlike a food diet) this is temporary deprivation. When you go to the grocery store those items that are taxed by the state are “discretionary”. If you see soda pop, beer, cookies, ice cream, chips--- anything like that---in your basket, you may be paying over 30% tax on these items. Remove them from your basket. You and your family need to go on a life-style diet for however long it takes to get out from under this debt….no new televisions, no dinners out, no beers at the bar. You’re living on borrowed money; you’re paying big time for everything you buy!
Obviously there are things you must purchase. We hope you know your family's essentials. Generally none of these items are taxed by the state. And yes these purchases will still incur the credit card tax; but as you pay your debt down, your CC tax rate goes down. Liquidate all stocks, bonds and savings, and pay it your creditors. (You're paying a far higher interest rate to your creditors than you're earning from these investments.) Sell your boat; or at least put it on blocks, out of service.
This is a period of deprivation, the degree of which is a function of the size of your debt. If you feel you can’t ask your family to share the consequences of your budgetary indiscretion, consider the value to your children of teaching financial responsibility. You must draw a line of distinction between (actual) essentials and non-essentials. The average family will find a multitude of routine purchases (soda pop, bottled water, lottery tickets, beer, cigarettes, sporting events, candy and snack food, trips and vacations) that can be pared from the budget. Scrutinize all purchases. Much of our energy consumption is discretionary. If you think it’s necessary to keep your home at 75 degrees in the summertime, think again. Civilization existed quite nicely prior to the 1960s without air conditioning. Turn the unit up to 85, or turn it off and buy a couple of fans. Save on gasoline by driving at 60 instead of 75.
Every cent of this money must be sent to your creditors, paying down your debt. Start with the card that charges the highest interest rate; make minimum payments to all others. Check with the bank that offers lower interest rates, and ask if you may transfer debt to that card from another bank that's charging a higher rate.
As your debt decreases, your credit card tax rate will descend toward zero. Even when you've paid off the last of the debt, however, you’re not out of the woods. The most important portion of a monthly credit card bill is in fine print. It’s in fine print because the bank hopes you won’t notice it. It's where you authorize automatic payment of your bill. After exercising this option, your credit card balance will be paid from your checking account every month. Be sure to check "pay total bill", as your option may default to "make minimum payment". (Minimum payment is what the bank wants.) You'll see a monthly review of the activity on the account, but you’ll never again send a check. You’ll never again miss a payment. You’ll never again pay the credit card tax. Don’t abandon your "budget diet" until your bank account has enough funds to cover future credit card bills every month. It may take a couple of additional months, but at this point, with no interest payments, no credit card tax and your austere "diet", that will happen quickly.
Now with resumtion of your previous consumption habits, you’ll have additional funds to spend or save that were wasted on interest payments. Do not charge anything that your bank account can’t cover at the end of the month. You've lived forty-seven years without one of those big TVs; you can wait a few more months! If you lose your resolve, the moment you miss a full payment, you’re back in the trap. All purchases revert to the credit card tax, and interest is charged to the time of purchase. With no outstanding balance, you use the bank’s money free!
For major purchases set up an account at your bank to make small deposits every month. Take half the money you used to pay for CC interest and put that away to save for your next car. If some emergency occurs, such as medical bills, that you don't have sufficient funds for, after making that charge, you must be sure to pay down the balance every month. Don't go back to minimum payment and let your balance increase!
The good news is that right now your credit card debt is probably stable. If it’s maxed out, you’re already living within your means! The interest on your credit card bills is your penalty for living beyond your means in the past. Turn the tables on the banks and start using their money; it’s free. In short, to get out from under this debt and start living better you sacrifice unnecessary items for a short period. Once you begin automatic monthly payment of all your credit card bills you will have more to spend and will never again pay the dreaded credit card tax.
Congratulations.
Index
The Credit Card Tax
Your credit card tax varies with the portion of your monthly disposable income that goes to credit card interest. We can quantify the loss in buying power from your income. To calculate the tax, first determine your actual monthly disposable income (d/i). This is your take-home pay, after taxes, minus necessary expenditures, such as mortgage, insurance, work expenses, water, minimum electrical rate, basic food costs and your minimum credit card payments. Remember, your minimum electric rate may be only half of what you’re paying. Total the interest expenses, not minimum payments, from your credit card bills and add it to your disposable income to arrive at (d/i + int). Now divide (d/i + int) by your disposable income. Your credit card tax will be the .xx figure following the 1 in the solution.
For example, if you have a disposable income of $925 per month, and $75 goes to credit card interest, then $1000 ÷ $925 = 1.08. Your Credit card tax is 8%. You pay this tax on everything that you purchase, in addition to sales tax, whether you use plastic or cash.
If you have credit card debt of $20,000 and you’re paying an average of 18% on the cards, with disposable income of $1200 per month, your tax will be: $1500 ÷ $1200 = 1.25, 25%! This makes your total sales or consumption tax approximately 32%! Get off this treadmill!
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