Credit card debt – scarier than Halloween!

How would you describe your financial position right now? What criteria do you use to judge how financially secure you are? For example, do you consider yourself to be financially secure because you are managing to juggle your credit cards? You know how when you've got just enough balance on card X to pay the minimum payment on card Y and next month you use card Y to pay the minimum balance card X? You are managing, you've covered your debts or so you think.

What happens if you have a sudden unplanned expense? For example, a kitchen appliance needs repairing, or your car tax is due. You've no money put aside so you are back to the juggling. Perhaps you can pay for the shopping by cheque (unfortunately, this really isn't an option any longer as very few if any places take cheques these days). It could be that you can take advantage of the 0% interest for six months offer, if you transfer your balance to a new credit card, plus you can use the opportunity to extend your debt!

Sounds familiar? This used to be my world. I never seemed to have enough money no matter how hard I worked or how much I earned. It was as if money and I lived on two separate planets. Then one day I decided to change all that. I decided that I was no longer going to be a slave to my debts and I was going to clear them all one after another. There was a reason I was in debt and that was because I use my credit card to purchase things that I couldn't afford.

I couldn't afford them because I didn't have enough money saved to buy them out right. I had bought into the ideology that it was okay to buy now and pay later. Indeed, why wouldn't you? There are so many incentives to use a credit card to buy now and pay later. Payment holidays, 0% balance transfers, discounts off your first purchases, cash back schemes, extra loyalty points. Anyone would think it was a win-win situation. You win and the debt card company wins too. Not so – it's worth spending a moment to look again (or perhaps for the first time) at the nightmare that is debt/credit card debt.

Let's assume you have borrowed £6000 on your debt/credit card and each month you opt to pay the minimum of 3% of outstanding balance or £10 whichever is the greater. Take a look at the following example and weep – yes I mean weep!

Principal: £6000

Payment: £180 (3% of remaining balance)

Interest: £100 (£6000 x (1x20%/12))

Principal repayment: £80

Balance remaining: £5920

You are weeping because this calculation is done each month until you pay off the principal. That's always assuming that you don't top up your loan by spending up to your limit again. In the end you will pay £12,720 in total and it will take you 15 years to clear the balance. That is more than double what you initially borrowed. Furthermore 20% is just an illustration; it's not unusual to find some debt/credit cards with APRs (stands for annual percentage rate) as high as 33%.

If these numbers sounds scary, they are. Many people stumble blindly into the promise of by now pay later without giving serious full to the long-term consequences. Deciding to become debt free starts by looking at the values you have around money. What did you learn about money from your family, your friends, from society in general and how has this influenced you when it comes to using money that you don't have to buy things now?

Once you are clear about your values around money you can start to have a better relationship with it and in order to do this you need to tell your money story. That is the story about your personal history with money. Unless you can tell your money story so that you can examine it as an objective observer, you will continue to cling to the types of limiting beliefs about money that create debt and a mindset of lack.