David Moffatt (00:00):
Hello, everybody. I hope you’re doing exceptionally well today. Welcome to the Escaping Debt Podcast. I’m your host, David Moffatt. And today what we’re going to be talking about is really managing credit card debt specifically.
David Moffatt (00:12):
Now managing credit card debt isn’t really much different, I guess, than managing other debt. However, it is a lot more dangerous than other debts, which we’ll get into for the duration of the podcast.
Debt can be a symptom of any number of problems and life circumstances. However, it is important to understand that YOU ARE NOT YOUR DEBT.
At 4 Pillars Halifax, we'd love to discuss how we can help you become debt free.
David Moffatt (00:25):
Remember that our mission and our goal is to make sure that no one has to suffer with the overwhelming burden that debt causes. And we believe that it is simply not possible for someone to represent both the consumer and the creditors in an unbiased fashion when assisting them with debt. And that’s why we work for you, not your creditors.
David Moffatt (00:43):
So let’s dive into this topic. And I think the first focus area should really be about the dangers of credit card debt specifically. So, by far if you look at it, there’s a few dangers of it. And really the biggest one has to do with the ease of access. Not just of the money on the credit card, of course, because everybody out there accepts credit cards these days.
David Moffatt (01:08):
You go and try to finance, you go to get a dishwasher, right? And they’re like, hey, you can just put this on credit. Right? But also getting new cards. You walk into a bank to open up a bank account and they’re basically ready to just give you a credit card without you even asking for one. When you combine those two things, the ease of getting the new cards and then the ease of accessing funds on those cards, it’s really, really easy to see why people get into trouble.
David Moffatt (01:39):
And then if you look at behaviourally, behaviourally, that’s probably not a word. But if you look at the behavior of most people, when you spend money on a card, the math actually works against you. So let’s look at a couple of examples of that. And I’m probably sure I brought this up, but if I haven’t, we’ll dive into it today.
David Moffatt (01:58):
So let’s imagine, okay, you have a credit card and you’re going to the store and you want to buy something that is $10. Okay? So, you got the credit card, you pick up your item, it’s 9.99. You understand how it works. So you think that you’ve spent $10, right? You go to the cash register, you swipe your card. Most people don’t even look at the price. And then you think that you’ve only spent $10, right?
David Moffatt (02:30):
But this actually isn’t the case, because there’s taxes on that money. And when you talk about this, it sounds so obvious. But the truth is, people don’t really look at the total purchase price. There’s been studies upon studies that have proven that you’ll spend approximately 30% more using a plastic card, whether it’s credit or debit card actually than when you use cash. So now let’s look at the difference of how somebody uses cash, right?
David Moffatt (03:00):
So let’s say, for example, they walk in and they have $20 cash and they go to buy that $10 item. Well, at least here in Nova Scotia HST is 15%, meaning then that $10 item is actually going to cost them 11.50. So they hand over that $20 bill, they get back a five and then $3.50 of change. I don’t know if you guys are like me, but I really don’t count change as part of my money. I count the bills. Right. And so, really you think that you only have $5 left.
David Moffatt (03:31):
So, do you see the difference there? One person thinks they only spent $10. The other person thinks that they spent $15, right? And so that’s the psychology that plays against you when you walk into a store, which is really why I believe that a lot of companies push this access to credit. A, it also removes a barrier of, I don’t have the money for it, of course. Right?
David Moffatt (03:55):
But secondly, people are way more likely to buy the item they think is only a thousand bucks, but then ends up costing 1,150 at the end of the day because they charged a card. And they don’t really realize because they don’t have to pay for 24 months or they can make a 0% interest payments for 24 months, all this type of stuff, right? It’s just a big marketing ploy. And so this is the big, big danger of credit cards, right? And I think we can all agree on that.
David Moffatt (04:24):
Credit cards are known to cause significant distress in people’s lives. I have seen people be more stressed out about a $3,000 balance on a credit card than a $40,000 balance on a line of credit. Arguably the $40,000 is more impactful to their life, but there’s a psychology of owing money on a credit card and rightfully so. If you look at the interest, the interest on most credit cards is 19.99%, roughly 20%. And that’s only if you make your payments on time.
David Moffatt (05:04):
If you fall behind, pay late even once, typically speaking, they’re going to jerk your interest rate up to 30% and sometimes even 35% on that credit card. So when you and I recently did a podcast talking with a couple of colleagues about the rule of 72, which is how long it takes money to double. A credit card doubles approximately every, I think, it was 3.8 years. It could be wrong. It might be four, 3.6. I can’t remember exactly, but the point remains that the interest is extremely impactful, especially if you miss payments. Right?
David Moffatt (05:49):
So, how do you actually go ahead and manage this credit card debt? So we’re going to talk about a few strategies here today, to hopefully try and get you out of credit card debt as quickly as possible with the least impact as possible. All right. So, one thing that I want to do as a disclaimer here is that, everything I’m going to be talking about today is assuming that when you make a money management plan, you actually have free cash leftover. Okay.
David Moffatt (06:14):
And when I say money management plan, I mean an honest money management plan, not the one where you make the numbers work just to feel better, ones where the numbers actually work. Okay. If you can’t make your spending plan work with your current debt payments or anything like that, you need to reach out for professional help. Right?
David Moffatt (06:33):
So that’s my little bit of a disclaimer. The last thing I want is for you to implement these things, which if your situation is worse than you believe it is, it can actually hurt your situation rather than help it. So, the first thing you really need to do is take an inventory of your financial picture, right? So you need to understand where your incomes come from.
David Moffatt (06:52):
You need to understand, with the debt, you need to know how much you owe, what the payment required is and your interest rate percentage that you pay on that. You want to understand what assets you have. So if you have a house, a TFSA and RSP and all these types of things. In this example, I do not want you to go and sell those assets to pay off debt.
David Moffatt (07:14):
I think any time you are going to consider selling an asset to pay off a debt, you should be talking to a debt restructuring professional, unless, okay, you can all ready pay off your debt amount in less than three to five years from today. Okay? And the reason why I say that is because if you can do so, that means you can replenish your assets relatively quickly.
David Moffatt (07:38):
If it would normally take you 10, 15 years to pay off your debt and you can pay it off by selling assets, I don’t recommend you do that. I recommend talking to a financial professional before you do that. Okay. So, you’ve now taken an inventory of your financial picture, what you have to do after that is start with a proper money management plan. Okay.
David Moffatt (07:56):
And so what does this entail? I’m going to cover this briefly because budgeting is boring, right? Is you want to identify your bad habits and really figure out where you’re overspending. Okay. You want to go through the last 12 months of your bank statement to confirm if where you’re overspending is actually where you’re overspending. You’re then going to want to take the last 12 months of your expenses, figure out if you think that they’re good numbers, like for example, if you ate out for $500 a month and you don’t want to do that anymore, obviously you’re going to try to change that. And you’re going to create a spending plan out of it. Okay.
David Moffatt (08:27):
So that’s step two. Step three is then to track your spending on a monthly basis as you move forward. The goal behind all of the steps is to have a significant clarity to your situation.
David Moffatt (08:38):
So to rehash these, what you want to do is, analyze your bad habits, go through the last 12 months of your spending, make a spending plan, and then ultimately track that spending. Okay. So, when you’re looking at prioritizing your debts, typically speaking credit cards are going to be one of the products that you want to tackle first. Okay? And that’s because credit card interest is exceptionally high. Okay? If you imagine it and look at the math behind it, for every $10,000 that you owe the average credit card, will cost $2,000 a year in interest. Okay. That’s just shy of $200 a month that goes directly to a cost that you receive no benefit for. All right. So every dollar that you put on to that credit card saves you a ton of money when you actually look at it at the end of the day.
David Moffatt (09:36):
So when you’re going through your spending plan, any free capital that you have, you should be putting it on your credit card. If nothing more than to limit the amount of interest that you’re paying. Okay. You might actually want to consider going to the bank and ask them for a consolidation loan.
David Moffatt (09:53):
Now, this is a double edged sword sometimes, because sometimes what ends up happening is people go and take out a new consolidation loan at a lower interest. And then they end up re-racking up that credit card rate from the get go. And this is why my disclaimer is, if your budget doesn’t work, you need to talk to a professional to make sure you’re doing things properly.
David Moffatt (10:13):
But consolidating can make a lot of sense. So, if you consider a $10,000 loan at only an 8% interest rate, where instead of paying $2,000 a year in interest, you’re now paying only $800 a year. So that’s an extra $1,200 or a $100 a month freed up. So, the idea would be that you now direct that principal directly to the credit card debt, which would now be on a personal loan or a line of credit or something like that to help you pay it down.
David Moffatt (10:45):
One of the problems that I find with consolidating for a lot of people is that, they don’t maintain the same amount of payments. And this all comes down to not being able to afford things right from the get go. But for example, on the $10,000 credit card, your minimum payment might be $300. Okay. Of which roughly $200 of that is interest, right? So you’re only paying a little over $100 dollars on principle. It’ll take you forever to pay off this account.
David Moffatt (11:14):
If you consolidate it, drop your payment now to only the $800 minimum interest payment, right? Let’s say, if it’s on a line of credit, and go and spend that extra additional money, which give me a second, I’ll calculate it here really quick. So, it’d be $66, right? If you go and take the difference of roughly $234 a month and go and spend it, well, you’re actually going to be worse off than just simply making that minimum interest credit card payment.
David Moffatt (11:45):
I know that sounds weird to say, but it’s true. So what I recommend you do, is if you were paying $300 before, that you continue to at least maintain the $300 payment. Now, what does that do for you? Well, that now means instead of it being a little over a hundred dollars that goes to principal, like on the credit card, you now have over $200 going towards principal, right?
David Moffatt (12:05):
And that makes a massive difference at the end of the day, because you just cut the repayment term on your credit card from probably 20 plus years to now. You’re going to end up having that credit card paid off in five years or less. And the cool part about this is, is that the more that you pay on to the account, the less interest that you end up getting charged, which ultimately means that the faster it gets paid off, right? So, consolidating can make sense, but you just have to make sure that you’re doing it properly.
David Moffatt (12:38):
You do not want to put yourself in a situation where you end up having to basically go backwards and re-racking up a whole bunch of credit card debt after the fact. Make sure things work, don’t get yourself stuck into the trap of interest rate.
David Moffatt (12:53):
I always say that interest rates are nothing but interesting, which means that you could have the lowest interest rate in the world, but if you can’t afford the payment it’s meaningless, right? So, I hope that one helps. That’s probably one of the biggest ones, if you can afford things to immediately save costs and not actually impact your situation at all.
David Moffatt (13:10):
So, I’ve had some people that without changing their payments period, they’ve been able to consolidate and chop down how long it’ll take to pay off their debt by 10 plus years. Right? So, the next ones are going to be deterrence for spending on your card. So, what I have seen time and time again, is people have an effective budget that they can stick to. But the temptation of having a credit card actually makes them spend more money.
David Moffatt (13:40):
So, for example, Amazon is a big problem for this, because you go on Amazon and you’re like, Oh wow, that’s such a great deal. I absolutely need this. So in my mind, I’m thinking of a TV, right? So, let’s say you go into a big box store local to you. Well, that TV might be $400, right? But on Amazon, it might only be $300. And so people think they had got such a phenomenal deal, but here’s the truth, they would’ve never bought the TV locally. To begin with their TVs, fine, excuse me, their TV is fine, but they have been wanting a new TV. Because they have access to a credit card, and they have access to Amazon, they go ahead and they basically buy this TV and then they re-rack up all of the amount of money they put on the credit card, right?
David Moffatt (14:28):
So you see this self defeating, I guess, function that happens. Right. So, how can you get around this? Right. So, if getting out of credit card debt is your number one priority, cut up the card. Okay? Again, when you look at these studies that basically prove that you’ll spend up to 30% more using a card, it’s probably the smartest thing that you can do. Operating on a cash based budget for the items that you can, of course, is going to make a whole ton of sense, right? So, cut up your credit cards in that way. If you really needed credit, you’d have to go and order a new card which would be really, really annoying.
David Moffatt (15:05):
I recommend that you remove all of the saved numbers and everything like that from any online platforms that’ll help you out as well. Next thing is that, and this might sound really cliche, but if you put them in a plastic container, freeze them, and well put it in your freezer so that it’s frozen. It’ll take a lot of effort to get to that card. Now it’s not going to be as much effort. The effort rather will be worth it if you truly need your card for “an emergency.”
David Moffatt (15:38):
Although I think spending money on a credit card for an emergency is still not that great of an idea. You should be having an emergency fund. However, and when I talk emergency funds everybody recommends three to six months. I recommend people start with a $1,000 just because $1,000 is obtainable.
David Moffatt (15:53):
And there’s very little in life that takes more than a $1,000 if you needed it today, right? It’s not perfect by any means, but start with 1,000 then build it up from there. So by freezing the card, if you need it, you can get it. It takes a little bit of thought and effort to go and get the card. So it’s not like you’re going to be making rash impulse decisions if your card’s actually frozen.
David Moffatt (16:16):
The thing that I personally like the best is, if you have a significant other in your life or someone that you truly trust, give them your card to hang on to. And whenever you need the card, set a rule in place that you have to tell them why you want the card. Two heads are better than one, right?
David Moffatt (16:35):
Finances are a very emotional thing. And we have these impulse urges to buy things, right? And so, if that other person does not have that impulse urge to buy something, then they will be a little bit more rational than you would be. So, I think that one is my favorite because now it’s two people putting their heads together to determine whether something’s worth it, rather than just yourself. Right? So I think that really is the key, right? So, some things that you want to know in managing credit card debt, just as general information, right? So, interest rates are extremely high.
David Moffatt (17:17):
We’ve already talked about it, but really you have to understand that when you start understanding the true cost of holding a balance on a credit card, you’ll be less likely to hold a balance on a credit card. Okay? I recommend you pay off the balance as soon as you spend the money.
David Moffatt (17:30):
If you treat your credit card like a debit card, you’re less likely to get yourself into trouble, where you hold balances, where credit card debt becomes a problem. You may already be holding a bounce, but you know what, if you start good habits today it’s less likely that you’ll do the bad habits tomorrow. When spending money with credit cards, actually spending money in general, just period, take a day to think about if you truly need something.
David Moffatt (17:55):
So, what I tell clients is that, if you woke up today and you didn’t need the item that you want to buy, then the chance that you actually need it are very, very slim. So, go to bed and if you wake up the next day and you still think you need the item, I’m not saying go buy it, but at least consider it more strongly. Okay?
David Moffatt (18:16):
I promise that trick alone will save you a ton of money. The second thing is that don’t just go browsing. A lot of people their hobby is to go browse at a… Go to the mall, or just go shopping and pick up a couple things. You got to remember every company out there is trying to sell you stuff. So, to avoid that just don’t go to those places, right? When you go to the mall or you go to a store, know exactly what you’re going to buy, go in, buy it and leave, right?
David Moffatt (18:44):
The reason why shelves are designed a certain way, the reason why they use yellow tags versus red tags, etc, etc, is all because those things are more likely to make you spend money. The more often you put yourself in a position to not spend money, the better your situation will be. Yeah. So I hope that helps.
David Moffatt (19:06):
I know it’s not the, end all be all guide to managing credit card debt. But really what I want people to understand is that credit card debt is simply too costly to continue holding onto. If you’re carrying a balance, you want to tackle that balance as it owes you money, right? So be ferocious and get that thing paid down as quickly as possible.
David Moffatt (19:29):
Once you get your credit card paid down to a zero balance or consolidated, I don’t necessarily at that point recommend that you cut up your cards, but you should strongly consider switching to a cash based budget or at least a primarily cash based budget. So I hope that helps.
David Moffatt (19:47):
So, guys thank you very much for listening to Escaping Debt Podcast.
David Moffatt (19:51):
Remember that our goal is to make sure that no one should struggle with the overwhelming burden that debt causes. We believe that it’s simply not possible to work for both the creditors and the consumer at the same time in an unbiased fashion when dealing with debt.
David Moffatt (20:05):
And that’s why we work for you. Not your creditors. We’ll catch you in the next episode.
David Moffatt (20:10):
Have a great day. Bye.