Living Credit Card To Credit Card: How To Break The Cycle

By Maxime Rieman

Most of us have heard financial experts decry the dangers of “living paycheck to paycheck,” wherein a person’s income is so close to their expenses every month that they’re unable to put any money aside for emergencies or retirement. Of course, these gurus are right to be concerned: saving is an important habit to get into because it is an important safety net and it allows us to build wealth.

So yeah, living paycheck to paycheck isn’t ideal.

But really, I think the personal finance professionals are barking up the wrong tree. They’re right to be concerned that a lot of us are failing to save, but living paycheck to paycheck isn’t the worst monetary state you can be in. As most of us who have been in serious financial trouble know, there is a much direr financial situation you can fall into: living credit card to credit card.

Yep, credit-card-to-credit-card living is about as bad as it can get. If you’ve never experienced this type of financial lifestyle, it goes something like this: you charge up a credit card to the point that it’s just about maxed out. You probably keep your head just above water by paying the minimums on the card every month, just to be sure your credit score stays solid enough that you can get another card. Which you do. Then you charge that card up, without ever paying the balance on the first card. Again, you keep up with monthly minimums, but pretty soon you need another card. And not long after that, you can’t keep up with the minimums on the two other cards, so you use the third card to pay the other two. But now you have no more available credit, so you need another card. And so on. And so on.

Many college graduates fall into this trap. They graduate totally broke – student loan bills, rent, a car payment, and a bunch of other expenses eat up their nonexistent paychecks. But they also don’t adjust their spending accordingly, and quickly open more credit cards first to accommodate their splurges, and then to pay off the other cards. Keep in mind, in the past--even just as recently as 2007--banks were still doling out credit as generously as those free lollipops. So for many graduates, it is—well was--really easy to keep getting new cards to bail themselves out of payments that were too high on the other cards, and, of course, gain a little spending money, too.

This cycle lasts for about a year, and by then most realize that they are drowning. This is when the stress begins: stressed out about money all the time; constantly concerned about missing a payment or worse, not having enough to even pay the minimums; and sweat-inducing nightmares. For those, who are experiencing this during the Great Recession, I can only imagine your feelings of helplessness and the perpetual state of fright you must be in.

The good news is that, you can turn things around. You can go from a total money-wreck to financially savvy with some stubborn resolve, sacrifice and the knowledge that it can be done; knowing that there is an end in sight can really help on those hard days. If you’re looking to break the cycle of credit card to credit card living, try a few of the tips below:

• Stop using the cards – This is probably the most important step you can take towards stopping the credit card madness. It will be painful and unpleasant, but you have to stop using your credit cards entirely, at least for a while. Freeze them, cut them up, give them to a trusted friend, whatever – just keep those cards out of your wallet and out of your hands for the time being.
• Don’t open any new cards – No matter how bad the credit card withdrawal symptoms get, resist the urge to open a new card. Even if you promise yourself you’ll be responsible with this one, just say no. At some point you may be in a financial place where credit cards won’t pose a threat, but that’s not now.
• Put yourself on a budget – One of the reasons you probably got into debt is that you failed to create a plan for your money, which is what a budget does. Figure out how much money you make every month, then make a list of all your expenses, including non-fixed monthly costs like gas and groceries. Decide how much you want to spend in each category, making sure to allocate a hefty amount to debt repayment. Then, stick to your plan!
• Also, put yourself on a cash allowance – Since you’re not using credit cards, you’ll need a way to manage your spending money. I recommend cash. Go to the ATM every Friday; take out your spending money for the week ahead. Not only does this reacquaint you with the value of money (cash is concrete, credit cards are abstract), when it the money is gone, it’s gone. This will keep you out of trouble!
• Increase your income – Once you’ve quit credit cards and set a budget, it’s time to get serious about debt payoff by increasing your income. Get a second job, baby sit, walk your neighbor’s dog, or find some other income stream. But just be sure you use the extra cash to pay off your debts – no shopping sprees allowed!

Breaking the credit-card-to-credit-card lifestyle is tough, but it is doable. Even after a month you’ll start to feel better. Keep your chin up and know that you’re working towards a brighter financial future!

Maxime Rieman is a writer for NerdWallet, a financial literacy site where you can find brokerage reviews, such as this TD Ameritrade Review, when you’re ready to start investing.

Five Signs You’re Not Trying Hard Enough To Ruin Your Life With Credit Cards—College Edition

By Maxime Rieman

In these competitive times, many of us are pursuing lofty goals with a drive and determination that would make Aesop’s tortoise look woeful. After all, who doesn’t know someone who’s training for a marathon, writing a novel, or traveling the world? These days it seems like everyone is working on something big, and the bar for what constitutes “accomplished” keeps getting higher and higher.

While there are a lot of worthy aspirations out there, many Americans are working on a very specific endeavor, one that could potentially have long-lasting consequences—ruining their lives with credit cards.

Millions of people in the U.S. are destroying their credit and running up thousands of dollars in debt; they’re maxing out their cards, buying tons of junk they don’t want and can’t afford, while only paying minimums month after month. But the truth is, many of us who are trying to destroy our financial lives with credit cards simply aren’t doing enough to make sure that this goal is reached and we are not maximizing the example we’re setting for others who will soon be prey privy to the wonders of credit cards. Try as we might, we’re behaving far too responsibly with our cards and we need to put forth more of an effort to make sure that we’ll never get out from under the weight of consumer debt.

So how can you tell if you’re not trying hard enough to mess up your personal and financial life with credit cards? Here are five signs you could be doing more to reach your goal:

You’ve Never Gone Over Your Credit Limit
This is probably the most obvious symptom: if you’ve never had to pay a fee for going over the credit limit that your bank set for you, you really need to consider charging more. The interest and fees associated with going over your allotted credit could be all that’s standing between you and financial ruin, so if you’ve failed to purchase enough with your credit card to exceed that threshold, it’s time to hit the mall. A credit limit is really just a suggestion anyways.

You Don’t Obsessively Check Your Available Credit
If you feel comfortable enough to keep charging your day-to-day expenses to your card without worrying that you’ve run out of available credit, you’re definitely falling short of driving yourself into financial ruin. People who are really committed to letting their credit cards take them off a financial cliff are the ones you see in line at the grocery store obsessively checking the banking applications on their smart phones to be sure they can get out with their gluten-free pasta. Take a lesson from their desperation and make a bigger effort to eat up all of that available credit with mindless purchases. It might seem tough at first, but you’ll find that once you really make a commitment to buying useless crap, it gets easier over time.

You Can Sleep At Night
Every real credit card junkie knows that putting the goal of ruining their lives with their cards requires sacrifice, and one of those sacrifices is a good night’s sleep. If you never (or only rarely) lose sleep wondering how you’re going to pay your bills, you’re definitely not going to achieve the objective of total monetary devastation. Take it as a sign to start charging more if you’re getting a full eight hours every night, and remember that if you’re in a pinch you can always start putting your fraternity/sorority dues on your card. Do whatever it takes to get those balances up!

You’re Not Getting Random, Threatening Calls From Collections Agencies
One of the most persistent reminders that you’re really going the distance towards meeting your objective of ruining your life with credit cards is the unexpected and brash calls coming from collection agencies at all hours of the day. This is basically a commendation for not paying your bills, no matter how much the person on the other end might be encouraging you to cough up the cash. If you’ve never been awakened in the middle of the night—even though you were probably up anyways—by a bill collector threatening to tell all your future colleagues you’re a deadbeat, consider this a sign you’re being far too timely and responsible with your bill payments.

You’re Thinking About Buying A House
One of the hallmarks of financial responsibility is homeownership; so if you’re considering buying a house after college, kiss that goal of messing up your financial future goodbye. If you feel that in a few years you can take on a mortgage, you’re obviously been much too careful with your cash. Worse yet, if you actually qualify for a home loan, it’s really time to buckle down and start swiping that credit card.

Getting into a financial bind may seem hard at first, but with a dash of college-freshmen-ignorance, a pinch of giving-into-peer-pressure-and-keeping-up-with-the-Jones-Kardashians-everyone-else and a pound of prolonged-bill-opening-avoidance, you’ll achieve it in no time. Take these signs into consideration to gauge your progress periodically and remember: never let a trip to the Apple Store pass you by!

Maxime Rieman wishes being an adult weren’t so hard. Luckily, she works for NerdWallet, where she found cheap auto insurance, learned the ins and outs of credit cards and generally, how to be more financially savvy.

Americans Slash Credit Card Debt but Rack up Student Loan Debts

By Eva Hilton

According to the Federal Reserve Bank of New York, the levels of credit card debt in the US have been steadily falling. In August 2012, they were observed to be at a level unseen for ten years, as was the rate of credit card delinquency. However student debt continued its upward trend along with the delinquency rate. Since household debt peaked in the third quarter of 2008, the level of student debt has risen by fifty percent. The change in the levels of credit card debt and student debt when compared to one another have been dramatic, as just over four years ago, the credit card debt total was greater than the student loan debt total by a quarter. By the second quarter of 2012, the student loan debt total was greater than the credit card debt total by a quarter, meaning that the roles had completely reserved. This means that we should perhaps be worrying more about student debts and less about credit card debts.

The Dangers of Student Loans

An article published in Forbes magazine examining the main sources of debt problems claims that one of the reasons that student debts have overtaken credit card debts is that all student loans are issued directly by the government, which asks very little about borrowers’ ability to repay the amount that is loaned or the type of education they are intending on pursuing. Obtaining credit using credit cards is less risky in a way because student loan debt is very difficult to discharge in bankruptcy. Many students are issued loans that they are never actually going be able to pay off. Critics have stated that this means that student loan debts can become a form of servitude that is impossible to break free from. There are calls for bankruptcy law reforms to address this issue along with a crackdown on exploitative for-profit colleges. Critics claim that the present expansion of debt stemming from student loans is not sustainable.

The Response

In an effort to reduce defaults on student loans, the U.S. Department of Education has tightened standards on loans issued to parents and grad students and allowed the postponement of payments during periods of hardship. The Department has also prohibited federal lending to universities if over a certain percentage of their graduates default over several years. The opinion has been expressed that this form of debt has been allowed to mount up partly due to the fact that debt prevention organisations have focused their attention elsewhere. Student loans are not seen in the same light as credit card debts. There is a stigma attached to wracking up large amounts of money on credit cards, whereas obtaining a student loan is seen as a necessary step to advance a person’s education.

Step in the Right Direction for Credit Card Debt

Bankruptcy and creditors’ rights experts Barry Chatz and Kevin Morse put the drop in credit card debt down to Americans becoming more frugal and warier about living on credit. This means that a step in the right direction has been made with regards to credit card debts. Morse and Chatz have stated that the decline shows a reasonable reaction to the current economic situation. However many are still unaware of the risks involved in obtaining student loans. Morse and Chatz claim that students should be more responsible for their decisions. At the end of the day, a student loan is a loan like any other and should not be taken out by anybody who feels that he or she is going to be unlikely to be able to pay it off.

A Loan by any Other Name is Still a Loan

Although student loans have now surpassed credit cards as a source of debt, it is still important to remain vigilant with regards to credit card use. Credit card users have made tremendous progress with regards to cutting their debts but there is a long way to go and credit card debts are still a burden upon many people’s wallets. Student loans might be viewed as necessary but they can be just as detrimental and should be treated with as much respect as credit cards. It is important to remember that a loan is a loan regardless of whether it is being used to further a person’s education or purchase material goods.