Week 10 – Consider Getting Rid of Credit Cards & Interest-Bearing Debt

In week 10, we are going to be taking a look at whether or not it makes sense to get rid of credit cards (and other high-interest bearing debt) for a time while we are on the path towards Financial Freedom. 

The answer to this question will be different for each individual and your present circumstances.  One thing holds true; it is important to be very honest with yourself about the role credit cards play in your life.  Specifically are credit cards friend or foe?

Credit Cards: Are They Friend or Foe?  

Over the past few decades, many individuals have been asking the question, are credit cards friend or foe?  The age-old wisdom says, “it depends”. 

I personally believe that if you use credit cards right, they can be one of the greatest allies in a Financial Freedom Seekers toolkits. This means that you are always paying the balance in full, you are taking advantage of the solid rewards, and you are never paying interest on any balances owed. 

You can read more on the benefits of credit cards here but for now we’ll want to explore whether or not we should consider eliminating credit cards and other high interest bearing debt at this point in your journey.  

Should You Eliminate Credit Cards?  

The key question we want to ask ourselves in this week’s lesson is, “should you eliminate credit cards from your life?” 

Keep in mind that if you choose to eliminate credit cards from your life, it can be a temporary situation where you decide to forgo the use of credit cards for a certain duration of time. Once you have created a solid foundation from which to build – low debt, high income, regular savings – then you can begin exploring how to best use credit cards to maximize cash flow and rewards.

Below are five questions that you can ask yourself to determine whether or not you should look to eliminate credit cards at this present moment.

#1 – Are You Paying the Balance In Full?

The very first question we want to ask is “Am I paying off my credit card balance in full each and every statement?” 

This means that you are able to pay off the statement balance in its entirety and that you are not incurring any extra interest expense. Why is this so important? Because oftentimes credit cards will charge you interest on purchases upwards of 18%. 

This is just a bad situation for anyone to find themselves in. Take for instance if you go out and purchase a meal at a restaurant that costs you $100.  If you were to tack on 18% interest, you will be paying $118 for that meal over the course of a year.  

In simple interest terms, that would be $118 over the course of a year.  Though compounding interest puts the real APR much higher, 19.56% to be exact.  This is because the interest calculates on the compounding balance (principle + interest) and not just on original purchases. 

Just check out this calculation:

Considering average stock market returns are 8% or so, imagine that you are buying a meal, letting it sit on a credit card for a year, and paying 19.56% for doing so!  And this calculation assumes a one time purchase of $100 with no subsequent spending.  Since most individuals utilize their credit cards frequently, this calculation will only go up as spending increases.  

This builds directly into our next question that we need to ask ourselves.  

#2 – How Much Interest Payments Did You Incur Last Year?

The second question which we need to ask ourselves is, “How much interest expense did I incur on credit cards during the previous year?” 

If the answer to this question happens to be ‘zero’, then I would argue that credit cards are not an issue for you at this present time and you can look to skip ahead in the 52 Week Financial Freedom Journey.  

If your answer is anything other than zero, it is time to take a good hard look at how credit cards are functioning your life. Remember that credit cards are the silent killer of Financial Freedom dreams the world over – virtually no one can afford the necessary savings or investing needed while they are paying 18%+ in interest costs.  

#3 – Do You Overspend?  

The next question to ask yourself is “Am I prone to overspending?” 

If your answer to this question is a yes or if you are leaning towards answering yes, then it would be wise to eliminate credit cards from your life and only use cash to make purchases.

Until you reach a point where you have developed discipline in the area of overspending, using only cash to make purchases will help in your life twofold: 

1. You will only be spending money that you have and not money that you will have in the future.
2. This will help lead to a ‘reset’ in your mind whereby you will begin to correlate everyday purchases that you are making to real income going out the door.  

What do we mean by overspending? From a simple perspective, to overspend means to incur more expenses than you have current income available to cover. 

This is very important to recognize as the most basic rule to becoming financially free is to ensure that we have enough income to cover all the expenses in our life. In fact, living with your means is the very first MoneyByRamey.com Rules of Money. 

If this equation is inverted and our expenses exceed our income, we will always be indebted no matter what the level of it our income happens to be. 

Take for instance if you make $50,000 a year but have $100,000 worth of expenses. This is not a recipe for Financial Freedom as you are spending more than you earn.  The equation is the same if you make $1,000,000 a year but have $5,000,000 dollars worth of expenses. Granted the more money you make, the more options you have to put that capital to work, but the principle is still the same; you must be able to live within your means to achieve your desired financial goals.  

When it comes to credit card spending, it’s far too easy to spend money that we don’t have.  If credit cards are an issue in your life, consider taking a sabbatical for a period of time.  

#4- Are You Disciplined When It Comes to Money?

The last question that you want to ask yourself is, “Am I disciplined when it comes to money management?” 

If you find that you are already disciplined when it comes to money management and that you are not incurring any extra expense in your life visa-vi credit cards, then kudos to you! 

However, if your answer to this question is no – you sometimes incur interest expense on your credit cards or pay an amount other than full statement balance – then I would recommend to strongly consider foregoing credit cards while you work on building up financial discipline in your life. 

How do you build that financial discipline in your life?  Take one daily step towards improvement, that’s how.  By committing to only spending money for things that you need – necessity expenses – and living within your means, you will be building the 

Summary: To Keep or Not to Keep Credit Cards? 

Whether or not you should keep credit cards at this point in time is primarily driven by your level of financial discipline. 

If you are someone who routinely spends more than you earn and has a tendency to pay less than your full credit card statement balance, then it would be prudent for you to look at eliminating credit cards in your life. 

Keep in mind that when you have built the necessary financial discipline in your life, you can look to reimplement credit cards in your life and see the benefits of doing so.  

WEEKLY FOCUS

1. Review the role that credit cards have played in your life. Have you had issues with overspending?   Take a general review of how you have utilized the tool of credit cards in your life.
2. Answer these questions: 
   1. “Am I paying off my credit card balance in full each and every statement?” 
   2. “How much interest expense did I incur on credit cards during the previous year?” 
   3. “Am I prone to overspending?”
   4. “Am I disciplined when it comes to money management?” 
3. If you have answered yes to any of the questions above, then come up with a plan to limit or eliminate spending on credit cards in your life at the moment.  It may seem like a radical proposition, but living within your means is vitally important to success!  
   1. It would be beneficial at this present time to begin identifying what expenses are vital and necessary versus which expenses can be cut.  We’ll dive more into this in future weeks, but for now begin looking at where you’re spending and begin to answer this question.