- Personal Finance
The Simplest Route to Financial Freedom
What does it take to be financially free? To some people it probably means being able to buy what they want when they want it. Having the money to take trips, buying drinks or meals for friends wen going out, having the car they want, having a nice, big house.
But to a lot of us, it means not being imprisoned by debt; not having creditors or high interest balances looming over you like a dark cloud; not feeling like payments you make are getting you nowhere because it goes almost entirely towards interest! It means being free of these things.
To a lot of us, it means being free of credit cards!
Credit cards companies are basically loan sharks. They make money flow like water. They take advantage of the materialistic society we live in, and make it so eeeeasy to get the things we want. "Go ahead. You deserrrrve it!" Suddenly, we are living the lifestyle we want to live! And we can afford it all, because the payment we have make each month is so small!
But it turns out that credit cards are the biggest bait-and-switch scam in history. Without us even noticing, the balances grow, because the lifestyle credit cards have afforded us is not one that we can actually afford; it was all an illusion. The minimum payments get bigger and bigger; eventually we are struggling to make them. We are the frog in the pot of water being slowly brought to a boil.
Eventually, the payments get harder and harder to make. You make a mistake by getting too close to your limit, which gets you a hefty over the limit fee of $20 or $30, potentially on top of a late payment fee. This makes getting under the limit and even bigger challenge. Then your interest rate skyrockets, and even less of your payments go towards your actual balance. The payments get harder and harder to make. If you keep slipping up, or even give up, then soon after, the threats begin, and this once-appealing lender is now someone you fear.
It's at this point that the credit card companies have you right where they want you. It will take years to pay them off, if you ever do, and in the end, you will pay them 2 or 3 times what they originally lent you (or more!).
What's interesting to me about this whole thing is the striking similarities to stories I've seen about loan sharks. A loan shark will find someone desperate for cash, and who cannot get a conventional loan. They make the money easily available, are very friendly, and tell you "don't worry about it. I know you're good for it". That element of trust instills confidence in the borrower that they indeed can repay the money. But the interest rate was deceptively high. The payments being made aren't making the same dent you thought they would, and they're harder to make than you thought they'd be. You slip up on one of the payments, and suddenly the interest rate skyrockets, and your loan shark is starting to get aggressive. He wants his money. Pretty soon, the threats begin, and this once-nice person is now someone you fear. He has you right where he wants you. It will take years to pay him off, and in the end, you will pay him 2 or 3 time what you originally borrowed.
Let me tell you about my friend Matt (I changed his name to protect his innocence :)).
When Matt was swimming in credit card payments, he had a lot of stuff. He also had a lot of bills. When he sat down and figured out his means, he saw that there was no way to sustain the number of credit card bills he had and still be able to pay for a house, gas, utilities, groceries, etc. He was left with $300 to feed a family of three for an entire month! It was just not going to happen. The situation was not sustainable.
He consulted "professionals", but their advice was all the same: "get on a budget", "figure out your income versus your outgoing", blah, blah, blah. He had already done that. And the jokers at the credit counseling service made him (and me) laugh with their offer, which turned out to be a monthly payment that was more than the minimum payments that were leaving him with next to nothing to support a family. The interest rates had hardly changed at all. What ever happened to "we negotiate with your creditors"? What a load of crap....
A Financial Rebirth
Matt had to make a couple of tough choices, but with an "irresponsible" payout from a retirement account, and a little bit of luck with a tax return, and the coincidental timing of a modest inheritance, he was able to get rid of all but a meager balance, which was paid off within 6 months.
He created a budget for himself, and hasn't carried a credit card balance since 2007.
That was the rebirth of his financial life.
Credit cards are a problem for a lot of people. Everyone's situation is different, so there is no "right" answer that will work for everyone.
- Borrowing or withdrawing from a retirement account may be the only option other than bankruptcy.
- A credit counelling service might be able to help some more than others.
- Going to a bank for a personal loan might the only option. Another common solution is home equity loan or line of credit.
At the end of the day, you are the only one who knows what is right for you. Different options carry with them different risks and consequences, and understanding what those are is the only way to know the right thing to do. But what's most important, in my opinion, is to get rid of the credit card debt, period.
The simplest route to financial freedom is getting rid of credit cards... with extreme prejudice.
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