I remember the days of having balances on multiple credit cards. I would love to say that I fondly remember those days but that would be a lie. When it comes to my relationship with debt there’s always been a discomfort with owing money. The root of this definitely goes back to childhood and seeing others struggle with debt. I’d always vowed not to see myself in that position having clearly seen the issues presented when debt gets out of control. The one exception to this probably being my student loan, which didn’t bother me too much, most likely due to the fact that:
- My degree would raise my earning potential.
- The interest rate remains low.
- The repayments are taken directly out of my pay similar to tax, so there is no decision to make around repaying.
Credit cards are pretty much the complete opposite:
- They don’t boost your earning potential.
- The interest rates are high (usually at a percentage involving double digits).
- There is a decision involved in making repayments not only whether to make a repayment (I strongly advise against missing payments) but also how much to repay.
At its highest my credit card debt was £3,000, which to some may seem like nothing, but to me was like an immense cloud. The debt wasn’t out of control – I’d “sensibly” arranged a balance transfer to a 0% interest card and knew exactly how much I was going to repay each month. The cloud was more to do with if my circumstances changed tomorrow I’d be stuck looking for alternative means to clear this debt. I had some savings, but for anyone who has experienced the London rental market it feels like an achievement just to have some savings, so I wasn’t trying to wipe those out.
Fast forward to now and my card balance rarely exceeds £100 and is paid off in full when used.
Motivation to Clear the Debt
Aside from the risk of my circumstances changing, I was surrounded by a number of more senior colleagues who would complain of being broke and unable to pay off their credit cards (despite earning almost 3 times the national average). That was a huge red flag indicating a change in lifestyle was required if I were to truly benefit from my earnings. Earning more wasn’t enough in itself; generally the more people earned, the more they spent. Boosting earnings, only to tread water didn’t sit right with me at all.
Repayment plan
My initial plan was to make repayments of £500 per month, that way the debt would be cleared in 6 months.
The Reality
In the first couple of months I made the planned repayments. I also kept putting the odd thing on the card (largely impromptu drinks and dinners). The card balance was declining but at a much slower rate than planned.
My repayment plan was unrealistic – it allowed for no social expenditure whatsoever. The result was plenty of frustration and slow progress. Following this realisation I cut my repayment amount £300 to allow me to live a little and removed the card from my wallet. I seriously wanted this cloud gone, so there was no room for temptation!
How long did it take to clear?
All in all it took one year to clear the balance – double my initial schedule! The additional time served as a lesson to improve the way I plan my finances and also acted as an incentive to keep my debts to a minimum.
So why am I sharing this? This all happened long before I took any interest in financial education. The debt wasn’t due to over the top shopping sprees or even fancy holidays, but more things that I needed but hadn’t adequately planned for. The easy thing to do was to put it on the card and pay it off at some point in the future. This is what many of us do, assuming our circumstances will never change, but what if they do? Would you be able to keep up with debt obligations?
By planning your finances you can limit the use of credit cards to emergencies. Even then if your financial plan incorporates an allocation to create an emergency fund (which it should) your card use can be limited even further.
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