Last week, National Public Radio’s “On Point” program highlighted credit cards, consumers, and a nation in debt. I was honored to be a guest on the show.
Harvard Law professor Elizabeth Warren, an expert on the credit card industry, was the main guest, however, and she had a lot of great things to say. (I admire Warren and her work, including the personal finance book, All Your Worth: The Ultimate Lifetime Money Plan.) After hearing my story, she made an interesting distinction:
There are three kinds of people who carry credit card debt. One is like J.D. He makes a lot of money, but he just spends more than he makes, and I understand that. But there are two other groups.
There are a lot of people who spend more than they make, but the difference is somewhere else on the scale. These are people who really can’t make it to the end of the month on $40,000 a year. They can’t support the kids, they can’t pay their medical bills, and those are a lot of people who are carrying credit card debt…Credit card debt — a lot of it — is about medical debt, about putting groceries on the table.
And there’s kind of a group in between those two. Those are the people who when they were young and stupid, were young and stupid. They…ran up some credit card debt…said, “Boy, I’m in trouble here.” But the problem now becomes the card itself.
I’m not convinced that Americans are in credit card trouble because they’ve turned to plastic to make it to the end of the month. I believe that most Americans get into debt because of consumer spending and bad habits. If you practice smart personal finance from the start, you minimize the chances that any one disaster can leave you in financial ruin.
I suspect — though I don’t have numbers to prove this — that unexpected emergencies are often simply the straw the breaks the camel’s back, but that the camel was already bearing the a heavy load of consumerism to begin with.
A recent New York Times article about Americans in debt profiled Diane McLeod, who fueled her lifestyle with credit cards and other debt. This worked fine until “back-to-back medical emergencies helped push her over the edge”. From my experience, McLeod’s story is more typical than that of a family turning to credit as a last resort.
But maybe I’m wrong.
If you currently carry credit card debt (or have done so in the past), what’s your story? What got you started? How did the debt get out of control? What’s your plan for paying it off?
How did you get into debt?
This article is about Ask the Readers, Credit Cards, Debt
My credit card debt is school tuition and books. I figured it was easier to float the balance on a 0% card while I wait for employeer reimbursement, but then I need to pay for the next semester. Now the 0% period is running out. I will try to pay it off quickly and throw everything at it that I can.
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Denial, addiction, restaurants, not paying attention. I ran up 30k in credit card debt. I’m on the last 5k to pay off after signing up on a debt management plan and reading and listening to Dave Ramsey.
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I was young and stupid. Fortunately I found the person I’m going to marry, and over the nine years we’ve been together, we’ve first helped each other get into debt, and we’ve helped each other get out. What finally did it was getting real, career-building jobs and a significant increase in income, while living well below our means. Not everyone can be so lucky.
I no longer carry any consumer debt and the mistakes of my younger years have finally disappeared off my credit report (one bureau, at least).
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After paying credit cards down to zero a couple years back, and getting as aggressive as we could on one smaller student loan I picked up recently for a research trip, we were planning on getting rid of the car loan next. I’m a grad student, and my summer income was going to be a bit less than the regular academic year income, but we’d set aside some in savings to top it off so we wouldn’t feel any pinch this summer.
Then we had to buy $800 plane tickets for a non-optional wedding. After building up that $1000 emergency fund again, I was waylaid by incredible back pain and had to reach a $1000 deductible before I could start paying a reasonable $15 for chiropractic. That $1000 has gone onto the credit card, and we simply won’t be able to finish paying it off until October. I simply wasn’t willing to drain the emergency fund when it would take five months to build up again.
I’ve been anxious about our finances lately, but my anxiety is about not being able to knock out debt like we originally had planned. We’re doing okay walking the fine line, but there’s very little we can cut out to keep up with the rise in gas and utility prices.
By the way, our debt includes the aforementioned credit card, about $5200 left on a car, two student loans (one of which is in deferment), and a mortgage. I don’t see that we’re going to be able to make much headway there until I finish school and get a job.
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My husband and I never had credit card debt. I do have debt from:
Student Loans
Mortgage
We no longer have a car payment as we focused on paying off the cars as soon as possible. It is now our goal to pay for future vehicles with cash.
I do not regret the student loans. Even though the most extreme frugal zealots feel I shouldn’t have taken out the loan. I think it is fine because the investment was in myself and not a “thing”.
As for the mortgage, I’m afraid I also do not feel bad about it. We saved for a 20% down payment. With the mortgage crisis as it is, should we have to sell our home we would be just fine and not “up side down”. Saving for retirement has been placed as a higher priority than paying off our mortgage.
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My credit debt, although not as serious as alot of the people who respond to your blog, was created because I got a credit card as a student, spent money I didn’t have on anything and everything, and when I maxed out the low limit I put the card away and tried to forget about it. And of course it racked up a rediculous amount of interest quickly.
I’m happy to say that I am one payment (as of today
) away from clearing this debt.
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I owe approx. €11,500.
Couple of years ago I have quit my stagnating real estate job and moved to my dream location – Andalusia, Spain.
Living in a rural area with no tourists (I ignored common sense and friendly warnings from other travelers) I haven’t made enough money to live on but sank deeper into debt. Trying to cheer myself up I went traveling overseas for a couple of weeks with borrowed money.
Also, wishing to start building an investment portfolio I bought a small ruin in an already depressed Spanish real estate market (again with borrowed money) that has recently collapsed and requires additional funds to clear it up.
Now I have moved back to Croatia and have found a ‘proper’ job while selling old stone cottages as a ‘side’ business.
I am in the process of trying to work out how exactly did I get into this mess and more importantly – how to find my way out.
I find your blog very inspirational.
Thank you.
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I married it. She picked it up spending on junk in college.
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One summer, a lot of my friends got married and invited me to attend and be in the weddings. I couldn’t afford it, and didn’t want to say no. All the gifts, plane tickets, bachelorette party events went on the card, and I’m still paying it off several years later.
It’s so hard saying no to something that’s fun and you don’t want to disappoint friends. I am still not married, but my friends, who I don’t keep up with much anymore, owe me big time. Weddings are good, but they can be expensive, even for guests. It’s unfortunate and sad that I’m in this predicament.
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We do not have any credit card debt, only one huge car loan. We were stupid and expected an additional income to help pay it off but that never came through. So we’re stuck with the car loan.
We do not have a lot of assets though because Hubby loves expensive toys and thinks that the whole ‘saving for the future’ thing is way overrated
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I bought my car in January, and I’ll have it paid off by next January. I’ve only floated a balance on a credit card a couple of times, but my standard rule is to always pay it off.
My roomate in college started the downward spiral with a new computer he financed. Then he financed an xbox 360 from best buy. Following that he opened up a credit card and rolled the balances in there. Between beer and a girlfriend he was running a balance north of $5k before we parted. On top of that he’s got a $20k car loan and students loans.
He recently graduated and has a good job now, but since I don’t live with him anymore I’m not sure if he’s taking on more debt or trying to pay it off. It always starts with just one thing…
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I think you are right. Unfortunately, I took out student loans to “get by” in college (on top of working part and full-time at various jobs). I was anticipating having a career with a good salary to pay them off with…now I’m a SAHM with a chronic illness. Then, after college, my husband and I also used our credit cards unwisely. So now, things are tight simply because of our bad choices in the past, and unexpected emergencies can really throw us for a loop. We’re working on it, though.
If people were to make smart financial choices from the beginning, as you mentioned, they probably would not have nearly as bad a problem if they had to put only a medical debt or something like that on credit. It’s carrying all the previous debt and THEN adding in a debt like that that does the damage.
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My wife and I did it basically by just making poor choices and not realizing how much of a burden it would be. We didn’t think about how much we were actually spending, just what we wanted to buy.
But it’s also about poor planning. I was convinced that I was going to be a history professor. It turns out, that its a really elitist field where you don’t make much money. Wish I’d done a little more research before I took out 40K in student loans. That was probably the stupidest decision I made.
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My old debt problem came almost entirely from a business. During, and right after college I had been running a business and wanted to expand it. I borrowed some money via a small loan. Then after a few months of not making any more money, that evolved into getting credit cards to help finance things.
Well, before you know it, all the money the business did make was strictly going towards the monthly debt payments. Finally, I realized it was time to close the doors or it would just get worse. I was able to sell what business assets I could for a fraction of the outstanding debt.
Then trying to keep up with the remaining debt payments while being unemployed was virtually impossible. Late fees, increased interest rates, damaged credit… it snowballed faster than you could imagine.
But hey, it was a lesson learned. And I would rather have tried and failed than to have not tried at all.
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JD,
I thoguht you were great on the program last week. I also thoguht it was a particularly good show as a whole. On Point tends to be really top notch.
Personally, I don’t carry any debt from month to month, I pay everything off when the bill comes. I use the credit card every chance I get though, because it makes tracking my finances a whole lot easier when someone else is writing everythign down.
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Maybe Elizabeth Warren has the macro numbers on debt that you’re looking for to back up her categories. Why do you think her three groups are not credible? I suspect that you wouldn’t hear about the more desperate examples because, rather than getting rich slowly and turning their lives around, they are dealing with bankruptcies, food banks, etc. You have good advice and life experience to share with one of the three groups, but probably not all of them. They probably don’t seek you out.
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You said: “I believe that most Americans get into debt because of consumer spending and bad habits.”
That totally describes me, and my current credit card situation. At first I would put things on my credit card and pay it off every month. But then I started using it more, and when I tried to pay it off all at once I’d run out of money by the end of the month and have to go back to the credit card. Then came plane trips for a long distance relationship, money for some dental work, and moving costs for a new apartment. Suddenly I realized I needed to get things under control.
I stopped using my credit card, started tracking every transaction, and now am slowly paying down my debt. Luckily I’m not in terrible shape. The interest each month on my debt is about $36. So I pay $136 each month cause I can easily handle it and I am slowly watching my debt decrease.
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I got into trouble when I was in graduate school. The first issue was that I needed student loans to attend (though I did not have any undergrad student debt).
The second was where I felt I really sunk. During my program, I had to spend a year working as an intern and I made about $1000 a month. I lived in a small studio apartment, but I also had no emergency fund. It wasn’t too long before a series of “emergencies” hit (related to car repairs) and I ended up needing to start paying for groceries with my credit card. That was the slippery slope. After about five months of that I lost the mental battle with the experience and just thought “the heck with it, there’s nothing I can do to stop this so I may as well have some fun while I’m sinking”. I don’t want to visit that place ever again.
I was able to deal with the credit card debt after I got married. I’ll save my stories of debt and marriage for another day!
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We simply spent more than we made – plus we really didn’t have a budget. We finally got serious and made a budget – (although it was painful!) We got rid of the credit cards (only use a bank card) and use cash now. It took some getting used to but now my wife uses cash envelopes for all of our spending. We are saving an average of $200-$300 dollars a month. Using cash makes you more aware of your spending. My wife uses the envelopes that she got on this website.
crunchycute.com. She didn’t want to use plain envelopes or something that looked like she was on a “budget” when she opened her purse to take out the cash. I think it was the credit card spending that really started the slippery slope for us.
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We have paid off all of our credit cards, but I’d say we’re definitely in the can’t support a family on $40K category. In the 50′s, you had electricity and a phone. Now, you have a phone, cell phone, cable tv, internet, computers, on and on and on. We keep those things to a minimum, but a $80 cell phone bill every month is much bigger to someone living on $40K than someone living on $80K. Housing may be cheaper where we live, but the other stuff – including food – isn’t. Before I had a family, I was making $30K living in a much higher cost area. I don’t think I’ve ever lived on enough money for it to be a “you just spend too much” problem, though I do believe there are people like that out there.
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Warren’s first scenario sounds a lot like my parents, actually. They lived a very frugal lifestyle and just couldn’t make it on their salaries. I believe it’s more common than we think.
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My husband and I use credit cards to make it to the end of the month. I have tried to find additional jobs, but with no luck. My husband has tried to find work and is currently working with temporary agencies. It is hard for him to find a job when he doesn’t have a college degree. I have one, and it is still hard for me. We live in a very poor region of Mississippi, and jobs are few and far between. We don’t squander money, we just don’t have enough to make it. We already eat noodles almost everyday, and with gas going to my job and his job at the end of the month, we are lucky to have 3 dollars left. I think you should consider that not everyone lives in a progressive area.
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I didn’t get a credit card until after college. Initially I had a low credit limit and used the card sparingly, paying off the balance even before the bill was due, just to establish a credit history.
Unfortunately my wife (fiance then) and I moved into an apartment at the same time wedding and honeymoon expenses came up. Neither of us had saved very much, so I asked the credit card company for a rate limit. Then some emergencies came up; I actually had to apply for a credit card to get my car fixed at one point!
I paid that card off and destroyed it, but I still had to get another card to increase my limit still further; we simply weren’t prepared for the expenses we’d incurred, but I couldn’t admit that to my wife.
After the honeymoon, the expenses died down, but I still had a lot of debt balance to pay down, and I couldn’t make myself do it. I’d gotten used to spending outside my means, so I just ended up carrying the balance from one month to the next, paying off only what I needed to put back on.
The story isn’t over yet, but it’s ending. I’ve talked to my wife about the problem; no more keeping her out of the loop. She’s holding my second card, which I’ve come close to paying off, and she’ll be holding my first card as well once the second card is gone for good. I’m probably still “at-risk”, but I feel like I’m on my way to getting out of the credit card debt. (Car payments and student loans are another matter!)
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My husband and I carried some student loan debt, car debt, and minimal credit card debt. I think we always saw it as a burden and didn’t get in too deep. We are currently debt free, besides a mortgage. Our mortgage is quite low and it would be hard to find rent in our area that is much less than our mortgage. I feel like we are in that “struggling to make it on $40,000 a year” category that Elizabeth Warren describes especially with inflation rising much faster than my husbands salary. But we are different because we are lucky to be doing our struggling on one income so that we can spend precious time with our kids while they are still children. But it is hard and I sometimes wonder if we will end up choosing to take on debt so that we can continue to do what we think is best for our kids, knowing that it wouldn’t be hard to pay off after they are gone and we can go back to being a two income, no kids household. What do you think?
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I’m closing in on age 26 and have over $12,000 in debt, $6k of which is student debt I got from going to college before I knew what I wanted to do. The rest of it came from need.
I used to work for a family business right as they were hitting their worst of times. Paydays were few and far between and, though I felt I was being responsible, I ended up having to use my credit card to pay my rent. I did my best to pay it back down when I did get paid, but it didn’t take long to get overwhelmed, max out the card, and then get evicted anyway. I also have a number of other lingering bills from that time to pay.
But, family is family, and I couldn’t just leave them hanging, even when it was putting me in a bad way. Long story short, I stayed on until we got the business back in the black, then looked for employment elsewhere. I’ve since payed my debt down by more than $3,000, but I’m proof that trying to be responsible can still get you into trouble.
Hell, I’d almost prefer to have done it by buying too many videogames or something, then at least I might have something to show for it. As it is, we have to make the best choices we can with what we have. I wish I’d learned more about finances before I’d entered that crisis; maybe I’d have come out with less overall debt than I did. If I could tell you two bits of advice, it’s this:
1) You haven’t been paid until it clears the bank. Period. Never count on promises and never make assumptions, no matter if it’s a major corporation or a Mom’n'Pops.
2) Financial responsibility comes from knowledge, so consume as much of it as you possibly can. Things you agree with, things you don’t, every bit can help. In today’s society, financial knowledge is the most important education you can get.
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I got into debt because I was “young and dumb” and then because of the cash flow crunch felt from making minimum payments I turned to credit cards to fund my lifestyle. I guess, in a way, you could say I’ve been part of all three groups at various stages of my life. Right now I’m at the “paying off debt like crazy” phase, which has been by far the most fun!
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I got into debt by marrying someone who had a lot of debt (most of it was grad school student loan, plus some credit card debt) plus we had some wedding debt. But even though I wasn’t carrying debt myself I was deep into the consumerist mind set and spent way more than I should. Before our Total Money Makeover I regularly spent $2000 a month on my credit cards which I did pay off at the end of the month. But, I’ve figured out over the past year and half that I was spending about $1000 a month more than I should of. I can pretty easily limit my spending (i.e. gas, groceries, eating out, gifts, entertainment, dry cleaning, clothes, etc.) to $1000 a month.
I think there are two major factors driving America’s debt problem.
(1) The cost of living has gone up in big ways (i.e. health insurance for a family, cost of college education, housing) and little ways (gas, groceries, etc.) and wages have not kept up.
(2) The consumerist life style – Americans are told to spend, spend, spend (think of President Bush after 9/11 telling people to go shopping) so many different ways so many times a day.
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Stupid consumer credit card debt for a lot of useless crap, some emergencies I needed money for and a totaled car that I needed to replace to be able to get to and from work – and I was up to 18 000 € (yes, Europeans too can be stupid enough to rake up consumer credit) – although a bank credit I rolled all the stuff in. Down to 15 000 € now and getting less every month.
I wish I could say I was young and dumb and have changed now and will never go back to my old ways, but it’s still a struggle every day to keep me from spending money for unneeded stuff.
I’ve curtailed my expenses down to the necessary now, have an emergency fund now and save for additional payments on the debt, and for a move nearer to the workplace which should reduce my monthly gas bill by a lot too.
The really stupid thing is that my parents were poor and because of this always frugal and only owned a credit card for a few months, but I ignored their lessons when I started to make my own money and could buy all the crap we couldn’t get when I was a child/teenager.
I would really like to travel back 10 years and bash my younger self over the head every time he used the credit card to buy useless stuff.
The only positive thing I can say about my financial past – and the only thing I have to show for – is having started to save for retirement as soon as I started working and having started saving up a governmental subsided plan, that gave me about 3.5 % after taxes over the last five years and should be finished next year.
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Young and dumb (Y&D). I wanted to live and have fun, and I charged a few things (esp. a trip to Spain) I shouldn’t have and bought a new car when I shoulda bought used (twice!). At least I/we ended up owning the cars and driving the cars for at least 14 years each, but still — being freaked out about layoffs was not fun with the debt hanging over us! (Precarious employment is still not big fun, but less scary with savings and manageable mortgages only).
DH accumulated his debts when he was married and signing credit card offers for bride #1 (I’m #2). His credit was a mess when I met him, but he had already dealt with most of his debts.
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Ours all started in college with credit cards. You know, the free t-shirt or frisbee offers and the “you need to build your credit rating”. When I started working, I’d live beyond my means, engagement ring – credit card, part of a car down payment – credit card. Got married and we loved to travel, so we racked up close to $25K of credit card debt. We also bought a house and all those incidentals you don’t think of went on the credit card. Then we decided to move to another state, so we sold the house (for a loss because the debt we took on to do some remodeling was about $10K).
We lived in an apartment for about a year in the new location and I worked out of the apartment. So we were actually able to make a lot of headway on the debt, paid off a car, a loan and a credit card using the debt snowball practice. Then we moved back to the same city as before and lived in an apartment, then bought another house.
Our debt than grew because of grad school, but that is the “good” kind of debt, supposedly. So now we have about $40K in school loans and only $4k in credit card debt.
I don’t count the $100K mortgage as “debt” since we would at least break even if we sold since the house is collateral.
Now I read your blog and others for tips on how to save money, invest, etc.
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My debt started shortly after I married my ex-husband. At first we put some new paint for our condo on a card, figuring we could pay it off quickly. Then we had a series of “emergencies” that we “had” to take care of: attending an out of state funeral, and paying for multiple car repairs. We barely had money for groceries, let alone that other stuff. Of course we just should have not done the stuff at all since we didn’t have the money. I eventually got out of debt.
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I figured that if I used credit cards, paid the balance, I would get free plane tickets. Quickly, balances wouldn’t get paid in full by the end of the month. I always rationalized it, thinking that, I work hard, have a stable job, never carry a large balance, contribute to 401 and other savings regularly, so why should I pinch pennies before payday?
Well, the balance got up to about $4500, and it started to freak me out. The interest wasn’t to unreasonable, but undesirable. What I really dislike was throwing my yearly bonus, tax return, and recent re-fi cash at my credit card debt. I would have rather used that for home remodel, jump start savings, or pay down an asset loan.
Now I am out of credit card debt and don’t use them. I contribute to savings, investments, and pay down my asset loans. However, now I feel like I am living paycheck to paycheck- for instance, I have $40 dollars until Wednesday. That’s annoying to think that way, but it helps me be a better spender.
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I got into debt in college. My Mom never let me have a CC when all those offers started coming in, and then jr. year I found how easy it would be to pay for a trip with a CC… I am still paying for that trip…8 years later. Not until my parents were divorcing did I learn more about money, finding out what was going where from them…
Now, my husband and I are trying to figure out how to get on track financially… we have all the typical debt, student loans, mortgage, cc debt and a bit of family debt from when were getting married…
We are working like heck to cut everything extra to come up with the emergency fund to start the debt snowball. We believe that we should have the ‘minor’ debts paid off in 18 months, leaving just my large student loan and the mortgage! WE ARE EXCITED!
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I have ~$60K in student debt plus a car payment. I live as frugally as I can, but paying $600/mo in student loan payments is hard. I make just enough money to pay my bills and put some into savings, but anything at all that pops up goes straight on the credit card. I just got hit with medical issues that, while I have good insurance, will put me behind again. *sigh*
So count me as one of those where the money I make just isn’t enough.
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Mine was due to a financial nightmare, not really of my own making. My first job out of college was at a small private pre-school. It was near NYC right after 9/11 and many parents had pulled their kids out cause the lost their jobs or couldn’t afford it. I’d barely been making enough to get by and had already started looking for a public school job when I was told that the school was closing at the end of the school year and that our “summer camp” was canceled. I couldn’t find a summer job…even Wendy’s wouldn’t hire me. Then the owner of the school claimed she could not afford to pay me (the only full time teacher) and kept putting off giving me my last month’s salary. I had to report her to the state labor dept for non payment of wages before I finally got my money…4 months later, 2 weeks before I started my new job. Out of spite for the labor dept thing, she delayed me getting my unemployment checks because your previous employer must provide the unemployment office with your salary and tax information. After 3 weeks of her saying she’d fax it over and she never did they finally accepted the information I gave them. So from the end of April until the first week of August, I had no income. I had to borrow money from friends to pay the rent. I used my credit cards to buy food and bus passes to look for a job until of course they suspended my accounts for nonpayment. I even had to return my cat to the rescue group. It took years to pay off all the debt that I incurred-a large part of it was fees and huge amounts of interest because when you don’t pay, your APR goes up to about 28 percent. Now one could argue that I should have had more savings, but how many people can save up 4 months of income on 8 months worth of work only 7 of which got paid for?
My parents are in the “can’t make it on 40K” group. Only of course when we were kids they weren’t making 40K, and don’t quite make that much now. They made enough to pay the bills but anything that happened – the fridge breaks, the car breaks, emergency plane tickets to Norway after my grandfather had a heart attack- went on the credit cards. I think it’s a bit arrogant of you to think that they and other people like them are just big spenders. My parents are not in debt because they tried to keep up with the Jones. They have never had a starbucks latte and they still have the same tv I watched Sesame Street on. They don’t have cable or internet access or cell phones. My mother buys her purses at Goodwill, not Coach. They took us to the park and the library-not Chuck E. Cheeze. They are careful with their money because they don’t have much of it. Could they do more? Probably. Couldn’t everyone?
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There are Americans ‘in trouble’ as you see it J.D., and then there are Americans ‘in trouble’ as Professor Warren sees it. Professor Warren is an expert on bankruptcy – I think she’s concerned about the people who really can’t get by, not the people who will be ok with a little belt-tightening. As she describes it in one of her books, most people who file for bankruptcy have already gone through belt-tightening and can’t squeeze out a penny more. Media focuses on the most sensational stories — the impulsive shoppers, the person screwed over by their insurance company, etc — but it’s not a reliable indicator. Nor is the self-selected group of PF bloggers.
Have you read any of her books? In one, she advocates for the average middle class family to live on one income even if there are two incomes in the family.
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I had the goal of becoming a military pilot and knew that having a number of flight hours would be most beneficial to that goal. So despite having no money in the bank and only working part-time while finishing up my first college degree, I spent $11,000 on flight school… all on my credit card.
I guess it was worth it as I’m now in pilot training with the USAF, but still… could have been much smarter about it.
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grimsaburger: you need to pay off the credit card with the emergency fund. That’s what the emergency fund is for. If it would take you 5 months to get the emergency fund back, it will only take you longer to pay off the equivalent amount in debt while paying punitive credit card interest rates.
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I don’t think anyone plans on going in debt. Our crunch came with owning a retail store. The business was doing great. We were living a high life style. Just built a home on a lake with an adjustable rate mortgage.
Then the big box superstars found our little community. We were working with our bank to restructure and we thought everything was under control. We bought our spring merchandise on our credit cards and then the bank pulled out. Our adjustable rate mortgage went up and we were in trouble.
Took us a long time to get of it and took some credit score hits.
We gambled on our business and lost. I’m smarter know and our debts are from business but we are better structured and we have a better business plan.
Learned lots of lessons.
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I had some consumer debt, then we went on a vacation, and some of that went on credit cards, then we got married, and two months before the wedding, my husband was laid off. It was snowballing. That was in April, and we’ve paid off everything but the $4000 left on the car loan, which we’ll pay off this year.
In short, if we’d been smarter, stayed out of debt for unnecessary expenses, and had an emergency fund, we would have been just fine. We didn’t need to be in credit card debt to put food on the table or anything. It was just a series of bad choices.
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A combination of medical and young & dumb. My husband and I were making phenomenal progress on reducing our debt when we were double whammied with long-term illness. Five years later we have debt that grows every month despite having medical insurance and a frugal lifestyle.
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I first wrote off my debt to being “young & stupid”. However, I soon realized that I DID realize what I was doing, so that wouldn’t necessarily qualify as “stupid”, but I chose not to address it right away.
Looking back now, I realize it was more “keeping up with the Jones’” than anything else. In college, I was more concerned with making great contacts and maintaining a social life that I couldn’t afford, thus I turned to credit. I rang up 15k in debt, plus another 30k in student loans, in 3.5 years. I’m down to a little over 6, and should have that paid off by the end of the year. My 3.5 year splurge has now taken 2.5 years to payoff.
Would I do it again? Perhaps. At what point is it worth the cost to sacrifice some personal debt to advance your professional career in the near future? Provided you know you will be able to pay off that debt shortly.
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I am an odd mix of her examples 2 & 3. I got into credit card debt after college, working in nonprofit without health insurance. And with one expensive health condition – I used to joke that visa was my insurance. By the time i was in my late 20s my cc debt was high enough for me to develop the dreaded “well since i’m in debt anyway what’s another $100″ mentality that I think quantifies Young & Stupid.
I have a good job now. I am smarter now. but it is taking a very long time to dig out of the mess.
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The challenge with the entire personal finance/debt reduction movement is that it tends to ignore the poor/lower classes for one reason or another. Can middle class people, such as you or me, relate to someone who has nothing, came from nothing and has no real vision for their lives? That’s the flaw with “pull yourselves up by your boot straps” thinking, it doesn’t take into account people who have no boot straps to pull up. We might think that this isn’t possible, or that since this is America everyone has an opportunity to succeed. But, whether it’s the Bible, Koran or other holy texts, every religious and spiritual philosopher from Adam to today understood the concept that there are genuinely poor people who are trampled on. Compassion for the poor and less fortunate is missing in this personal finance movement, in part because we can’t relate.
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I can say that my debt was fueled by two things. The first was that I wasn’t savvy enough to realize that “credit cards don’t mean you’re rich”. I ran up a *lot* of stupid debt when I was young as a way to “show off”. I also incurred larger debt from buying gear for my “professional career” (i.e. my goal was to make it as a musician in the late 80s and early 90′s) and using credit cards and such to pay for recording time and promotion that never recouped what I put into it, to the tune of about $35,000 worth of debt (which at the time was *way* more than I was making in a given year).
In 1994 I bought a car and paid cash for a large portion of it and financed $10,000 for the rest. It was shortly after this that I realized that I had no breathing room at all; I was having to work 12 hour days just to make the payments and help keep my wife and I afloat. We were maxed out and it was almost 100% my fault.
We had one very lucky component that helped us, though, and that was my working for a tech company that offered stock options. In 1995, I made the then painful decision to sell half of my total shares I’d been granted to clean up our debt mess. I was reminded, often painfully as our stock price continued to climb, what a price I had paid to clean up the debt mess that I had made, and what those shares, had I held onto them, would be worth later on. Still, there was a peace and a joy that I felt when that debt was eradicated and I was able to say that we didn’t owe any money to anyone.
Four years later, it was time to buy a house. I had been stockpiling option shares for several years since our debt cleanup. When it was time to buy, I made a decision to make a very large (i.e. 75%) down payment by selling the shares, and take a small 30 year fixed rate mortgage that would fit into my philosophy of no more than 25% of monthly take home pay going towards a mortgage. I could have done a total purchase of the house with cash, but I was betting on the stock rising even higher, so I didn’t want to put *everything* into the house at that time. Plus I thought the tax write off would be a good advantage (I hadn’t yet come to the realization that giving a bank $10,000 so I could avoid sending $4,000 to the government was bad math). Thus, I went from being debt free to having more debt than I’d ever had before… but it was good debt, right (LOL!)?
After the tech meltdown of 2000, my remaining shares lost about 75% of their value, and I was too shell-shocked to do anything about it. I kept believing that they would come back, they *had* to! Well, eight years later, they still hadn’t. In that period of time, I had to contend with job layoffs, going back to school, and raising three kids that were getting more and more expensive. Add to the fact that, because of my job situation changing and my earning less than I did at my peak, my “easy” house payment wasn’t so easy for a few years. Thus, each year, we raided the stock account a little more, and each year it went down a little more.
Last year, I looked good and hard at our financial situation, and I realized that we were going to have trouble continuing to make ends meet, and goals like saving money for retirement or college would be hampered. As I looked at the dwindling stock account, I realized that we had just enough shares still to pay off the house entirely, and that by doing so, it would free up close to 20% of our take home pay to be used for savings and other goals, plus we would be able to own the house free and clear. Ultimately, that’s what we decided to do.
Looking back, I realize that getting into the situation was all my doing and it was all fueled by trying to do something grand and at the same time show off in the process. Had I not had the opportunities that those stock options provided, my life could be *way* different now. Fortunately, I realized that I had to wean myself off of having that heavily eroded safety net and put solid fundamental plans in place. Today we live on a written budget, make sure to bank that old house payment every month, and we look for ways to economize and wring out every spare penny we can where we can, not because we fear the wolf at the door, but because we want to win long term. Looking back at what might have been isn’t very helpful, but it taught me some valuable lessons about sacrificing opportunities for security, and the dangers of sacrificing security to chase opportunity. Both are good when managed correctly, but too much focus on one or the other can be costly in different ways.
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Student loans and I had several credit cards when I was younger. I was also manic in my early twenties and as many know, spending is one activity that some people do while manic.
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Ours was a combination of young and stupid and being used to a certain lifestyle. My husband and I were married the day after law and med school graduation, with a combined debt of $150,000 in student loans. At first we ate out a lot and shopped a lot and financed 2 new cars in 1 year. I felt really bad when I had to spend a $12,000 inheritance to get rid of credit card debt. When we bought our first house and put all our savings into a 10% down payment, we financed bedroom, living room, and dining room furniture. Now that we’re on the Dave Ramsey plan, we’ve paid off the cars, have no consumer debt, and have about 1 month of expenses in an emergency fund. We still have that huge mountain of student loan debt though, now about $136,000. It’s still a struggle, but we vow to never carry a balance on credit cards or finance a purchase ever again. If you can’t afford it right now, DON’T BUY IT!
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My sister is in the camp of not making it on 15K a year. She wasn’t extravagant with her living, but chose to work part time or sporatic hours to pursue more artistic pursuits. It’s one of those things where as long as nothing bad happens you’re ok, and who knows maybe with one of your other projects would pan out. When she didn’t have health insurance she ended up being hospitalized for almost a month. She bemoans the fact that for the amount of her hospital bill she could have gone to Hawaii for a month.
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Flying lessons but well worth it!
My dumb choices were mostly going out to eat, jewelry I rarely wore, and oddball artsy stuff that now just sits around and collects dust. I never ran myself into to major debt, but I pretty much spent everything I earned. Now that I’m in my early 40′s, I’m very focused on saving for the future.
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I did use credit cards as a survival tool. I was laid off from my job three years ago and after unemployment ran it’s course I knew I wanted to try something new. So I started working for a dog walking business which I loved, but it was not paying the bills. I cleared out my savings in a matter of months and I kept getting credit card offers and I thought “okay, I’ll get just one more card”. Next thing I knew I had three and because I was in denial about not being able to survive on my dog walking salary I began charging everything on the cards out of necessity (bills, groceries, gas, etc.). I knew it was incredibly irresponsible, but I got overwhelmed and depressed and started not to care anymore. Now I have no credit cards and I’m working on paying off the $25,000 debt with the help of a debt management program. It’s been a painful learning experience and no surprise that I come from a family that never learned how to manage their money properly (which is something I still need to learn). What’s really sick is that despite working with a DMP one of my previous credit card companies sent me a letter saying they were pleased that I was taking control of my debt and they were opening my line of credit again. I cut all my cards and will NEVER have a credit card again (thanks to my credit rating I probably couldn’t get one anyway)!
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