We’ve all been there. We make plans, set our goals and have nothing but good intentions to see them through. But, sometimes life gets in the way when we make plans. I feel that is what happened over the past couple of months. Before, I had a high credit score and relatively no debt other than my mortgage and student loans. Now, I am saddled with credit card debt and a lower credit score as a result. But, I realize that my mood and thought process were affected by the increased financial pressure. I also realize that I really just need to get back to the basics. So, that’s what I’ve decided to do.
Back To The Basics – Stop Digging
Will Rodgers once said, “If you find yourself in a hole, stop digging.” This is definitely true when you find yourself in debt. For the past two months, I’ve been relying on my credit cards because I didn’t have enough cash on hand. Because of this, I am now back in credit card debt. In order to get back to the basics, I plan on getting rid of my credit card debt.
I have two credit cards that I racked up debt on. I decided to take both cards out of my wallet to prevent me from going into further credit card debt. Let’s take a look.
Chase Credit Card
I have a chase credit card. My credit limit is $3000. However, a recent balance on my chase credit card was $3799. You read that correctly. I was nearly $800 over my credit card balance. That’s just insane! But, it’s part of the reason why my credit score went from excellent to just good.
There were some necessary purchases on that card. For example, I bought a car and put $2000 down. I paid the $2000 with my Chase credit card. But, the rest of it was wasteful spending, which is currently out of control. I definitely need to reign in my spending habits.
I find that once I start carrying a balance on my credit card, I continue to justify additional spending.
In any case, I recently made a $900 payment on my chase card. So, the balance is around $2900, just under the credit card maximum. My goal is to pay this off as quickly as possible.
The interest rate on this credit card is 6%.
Credit Union Credit Card
I have a credit union credit card that has an interest rate of 11%. The credit limit is $5000, although I think they upped my limit without asking. I usually never use this card. But, over the last couple of months, I find that I use this card often.
The balance on this card is around $2100. Again, this reflects both necessary and wasteful spending. For example, it was necessary for me to rent a car for a while and that expense adds up quickly. At the same time, I also spend a lot just eating out every day. Sooner or later, I will reign this spending habit in as well.
I recently made a $900 payment on this credit card as well. So, the current balance is around $1200. Much like the chase credit card above, I plan to pay this off asap.
More Credit
Well, if you thought that having two credit cards was not enough, I decided to apply for two more. Say what? Why would I do that?
Let’s take a look.
It’s All About The Points
I applied for two cards and the only reason I did so was for the points. One of the things I realize is that I don’t really have any benefits with my current credit cards. Moreover, I will be traveling a lot for work and so I decided to get credit cards that were geared towards that purpose.
I have both the Chase Saphire Reserve and the American Express Platinum. The Chase Saphire Reserve comes with a whopping 17% interest rate and a $22k limit. However, I get three times the points for using the card when I eat out. There are other benefits as well. The plan is to use this credit card for my day-to-day expenses and pay it off at the end of the month. That way, I won’t have to worry about the 17% interest rate.
I am mindful of Dave Ramsey’s approach to debt. One of the things he says is that if you play with snakes, you will eventually get bitten. There is a concern that I will find myself in a situation like the last two months, where I have to carry a balance on the 17% interest rate. I am hoping that eventuality won’t happen and I will take steps to mitigate it.
I’m not sure what the interest rate is on the American Express Platinum as I haven’t received it yet. But I might very well only use one of these cards as opposed to both. We will see.
Emergency Fund
In order to get back to the basics, I will fund an emergency fund. Before, I was following Dave Ramsey’s approach to have $1000 in an emergency fund. I think I need more than that. Right now, I don’t have any.
I am not sure how much emergency fund I need. But, I think around $2000-$3000 should be sufficient for at least a starter emergency fund. I probably would feel better with $5000, but I also hate having all that money lying around doing nothing. So, I’ve decided to increase my emergency fund to about $2000, before I focus on devoting extra cash to my dividend portfolio. I say extra because I still intend on maintaining the minimum level of contributions I’ve been making to my dividend portfolio.
There is a very small chance that I might pause contributions for a month or two to speed up the process, but I highly doubt it.
Conclusion
So, as a recap, in order to get back to the basics, I will fund a more robust starter emergency fund and get out of credit card debt. I also plan on using my new credit cards wisely by paying off the balance every month. By doing both of these, I should be able to get back to a strong financial foundation. That will allow me to more effectively save for a down payment and then pay off my car and student loans early.
This post focused on only a small part of my overall debt. In a later post, I will discuss more about my saving and investment goals. In the meantime, what do you think about my current plan? Let me know your thoughts by commenting below.
Hi DP,
It’s good that you are noticing the problem and have a plan to solve it. Good luck in getting out of those debts!
I personally don’t use any credit in my credit card for ~5 years now even if I could pay it down the same month. I am thinking to even disable the credit on that credit card. I think emergency fund could do the same function as a credit card but you don’t pay interest on it. You would borrow from yourself, not from the bank.
-BI
BrokeInvestor recently posted…August 2018 Summary
BI, credit cards can be scary sometimes, but effective when used wisely. Let’s see if I can figure out the difference.
Ou credit cards is a nasty thing 🙂 Also had one small limit and was always in debt. Just cover them and close them 😉 Thats what i did. Stop investing ect but close these cards.
p2035 recently posted…2018 Q2 Budget
I’ve never redeemed points before, and I want to give the use of credit cards a try to be able to do so. I think there might be real value there, but the key is to use the cards wisely. I’ll be vigilant in that regard.
Good luck paying that down! It’s easy to get stuck in the trap of making minimum payments/carrying a huge balance until it spirals out of control.
Best of luck – looks like you are on top of it
Jordan Maas recently posted…Negroni
Definitely on top of it right now, but I’ve been there where I was deep in credit card debt. It bothers me when I have a balance from one month to another. So, I don’t anticipate ever being in that situation again, but I will watch it closely. If I see it’s getting out of control, I have no problem closing the card.
Credit cards can be a slippery slope, as you have experienced–and unfortunately, as with most things that are bad for you, it is so much easier to dig the hole than it is to get out of the hole. Definitely work on getting those paid off, and I would even encourage you to pay them off before you start using the new card for all of your expenses.
We use a couple of cards for most of our expenses, but have been diligent about paying them off every month in full. Ever since we eliminated all of our non-mortgage debt many years ago, we have not paid any interest since then. The key thing is that you’ve identified the problem and are making changes to fix it, and then you just need to remain diligent and honest with yourself to control that spending.
Do you operate with a budget or spending plan? Do you have some things like eating out covered as part of that plan? I see that a lot of people try to be so restrictive that they end up falling off the wagon, so it might be worthwhile to include some of that in your regular spending so you avoid repeating the behavior.
DivvyDad recently posted…Dividend Income Report :: August 2018
Thanks for the suggestions DD. I have an interesting take on my spending plan. I don’t have a strict budget per se. Quite frankly, I’m pretty sure that I would save A LOT more money if I followed a strict budget. Instead, I follow Ramit Sethi’s approach to budgeting. Specifically, I focus on the BIG things (contributions to my 401k plan, dividend portfolio, etc). I make sure those are taken care of. Then, whatever is left over, I spend in any way I see fit. So, if I have $400 to spend over the next two weeks, I can spend $300 on food, and $100 on entertainment, or any combination thereof. Sometimes, I spend more than I allocate as ‘discretionary spending’ so I don’t even follow that plan religiously. The goal is to engage in guilt-free spending, but I still feel guilty spending (aka wasting) all that much money. At the same time, I don’t feel like I’m disciplined enough to follow a strict budget. I realize that’s probably just an excuse, but it’s also more a realistic assessment of who I am.
At the end of the day, blogging helps because I am constantly and keenly focused on my finances. I recognize the areas I need improvement on, and even when I stray, I am never too far away.
You hit a key point there, and that is that you have to find the strategy that works for you. We are all different and have different circumstances, there is never a one-size-fits-all approach to managing your money.
I am with you in not having a strict budget. We certainly have categories and targets that we try to achieve, but as long as our savings goals are being met, I am not concerned with how each dollar is spent across the other categories. On an annual basis, we then review how we did in comparison to our targets, and look for areas we can get more value from and adjust as necessary.
DivvyDad recently posted…Pension to Rollover IRA Analysis
I completely agree DivvyDad. personal finance is personal for a reason. We have to do what works best for us. Thanks for the comment.
Well it seems that you’ve definitely dug a hole, but it’s great that you’ve stopped digging. Get your head back into the game, stop juggling debt and I also would advise to close the cards. If you’re past few weeks are an indication you sometimes seem unable to stop spending on credit. With 17% interest that hole will dig itself without you.
Just my 2 cents ofcourse. Do with it as you will 🙂
Yea. It’s important to remember though that the card with the 17% is not the one with the balance on it, but it’s definitely one I watch like a hawk. I use that card every day now but I pay it off frequently. I don’t let the balance get too high and I use only what my ‘budget’ allows, so to speak. Cutting up the credit cards is something I might do someday, but not in the immediate future.
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