Danger Ahead: The Credit Card Disconnect

 

Have you been playing a sad song of too much debt?

Is it time to change your tune?

If you’ve visited our pages before, you already know you can plan ahead to save money and cut expenses (see our Great Savings Tip series).  But what do you do if you’re just now waking up to the tune of an ever-growing pile of debt?  Maybe it’s time to get serious and go cold turkey with those credit cards.  Believe me, it may be far more critical than you realize.

 

Our Brains Understand Cash

 

Humanity has a long history with cash.  We know how it works and can watch it come and go.  We find it convenient.  And though the whole idea of cash seems basic on the surface, underneath there are some important things occurring that help us understand value.

 

Long ago we learned that when we make a purchase with cash we’ll use certain currency that is conveniently broken up into set increments—we’ve come to call these increments bills.  Different bills become very convenient for buying goods and services.  For example, if a donut costs $3 we can reach into our wallets and pull out three one dollar bills, or maybe one five dollar bill and then get two one’s back, or a ten and then get a five and two one’s back, etc.  Thus, as go about our lives using cash we gradually come to see a direct connection between the denominations listed on the bills and what they allow us to purchase.

 

If you think about it, this connection we speak of is another way to think about value—that is, we place a value on certain bills for we know we can trade them in for some of the objects or services we desire, though not for others deemed more worthy.  In essence, the cash we use helps us build a framework for the relative value of everything we purchase.

 

 

Another important thing that happens as we use up our bills is we lighten our wallets.  In other words, we see money flowing out of our possession as a direct consequence of our decision to spend it. This turns out to be critical.

 

The debtors house of cards.

Living with debt is like living in a house of cards.

The Plot Thickens

 

Credit cards are a different story, altogether.  Credit cards are relatively new in the history of humanity, and as such, our brains find them confusing.

 

A credit card still allows us to purchase the donut we desire, yet the value framework being generated is different than the one created when we use bills and ultimately messes with our entire understanding of money.  This confusion occurs since (a) we don’t see actual dollars flowing out of our wallets as a direct consequence of making a purchase, and (b) the very same card we use to buy our donut can also be used to buy $100 of groceries, $250 of new clothes, a $15 movie ticket, etc.

 

Let’s dig a little deeper and examine why the definition of value becomes mushier the more we use our credit cards. Here’s what happens: Let’s say we continually buy goods and services at various prices using the same credit card.  The prices diverge widely—some prices are high and some are low.  Yet even with this divergence in cost we come to expect that paying with our card always results in getting the desired goods or services we want.  Gradually, and without even noticing it, we begin to view all use of a credit card as the same basic thing. At some level this is confusing because if we stop and think about it we know a vacation should cost more than a cup of coffee.  Still, in our minds the card allows us to buy coffee, the card allows us to buy books, the card allows us buy clothes, tools, groceries, vacations, etc.  Thus, our brain begins to form a relationship between credit and buying that looks something like this:

 

Credit Card = Coffee = Books = Clothing = Everything

 

Ultimately, this formula is wrong for it fails to take into account the payment side of the equation.  And here’s where we run into still more trouble.  Instead of a paying for a $3 donut, up front and in cash, we end up looking at a bill totaling $3000 dollars of debt and pay a couple hundred dollars each and every month with little real thought about what this debt means or what it does to our overall wealth.  Thus, our donut gets completely lost in the larger dance we do to stay afloat financially.

 

Can you see how our whole concept of value gets skewed by the use of credit?  As we continue to replace cash transactions with credit transactions and accumulate ever larger debts we start to lose sight of the fact some things are intrinsically more valuable than others. In essence, by using the card we create a value/payment disconnect.

 

The Time Bomb

 

And while our concept of value starts to skew, we also run into a potentially bigger issue—one I call the time bomb cause/effect disconnect.  This disconnect comes about as follows: Since we won’t see a credit card statement and therefore won’t pay off our purchase until some date in the future, we separate the specific cause of our growing debt load from the effect it has on our reducing our overall wealth.  Perhaps a simpler way to put this goes something like this: The more time that goes by, the harder it gets to make any connection whatsoever between a specific item we purchase and actually shelling out money to pay for it.

 

It’s definitely worth noting the time bomb cause/effect disconnect gets worse when we attempt to work off debt by making smaller “more affordable” payments.  Why?  Because now our purchase and payment end up being separated by months or even years.  Remember our donut? Well, over time our $3 donut can end up costing $6 or even $9 after we tack on all the accumulated interest charges that come about from not paying off our balance.  Should I even bother to mention this is a price we’d never pay for a donut if we were to purchase one with cash today?  And sadly, as our debts continue to build our donut purchase will be so far in the past we will have forgotten how it contributed to our debt in the first place. Here’s where the time bomb explodes in our face—we end up in a ton of debt, we don’t know how we got there, and our only option out is bankruptcy.

 

In the end, (a) unless we have enough money to pay off our credit cards each and every month and (b) unless we exercise responsibility in how and when we use those cards to make purchases, there is a very real danger they can create a mental disconnect—one where time, value and money get jumbled in our heads and our debt spins out of control.

 

Getting Out

 

Take the next step to get out of debt: Go cold turkey.

Is is time to lock up those credit cards?

So what’s the best way to become completely debt free?  By now, you’ve probably guessed the only sure-fire method of getting out of debt is going cold turkey.  What do I mean by that?  I mean you need to pull all of your credit cards out of your wallet and put them somewhere completely beyond reach.  Let me put this another way to avoid any confusion:  Do whatever it takes to cut yourself off and make a clean break from the temptation to use credit.  The goal going forward should be to avoid using your cards at any and all costs.  And if you do have to use them, the only reason would be for some life-threatening emergency.  Some people might do best to destroy the cards altogether, but if that feels too extreme just trying locking them away in some safe spot.

 

Once you’ve put the cards away, the next step is to use an all cash-based system or perhaps a cash and check only based system for all of your purchases.  Note: You may also want to avoid using debit cards for some of the same reasons discussed above—that is, they offer similar pitfalls to their credit cousins because they still skew our sense of value.

 

I'm going all cash and tearing up my credit cards.

Try living with a cash-based system.

A cash-based system could look like writing checks for the big ticket items like rent and utilities, and then taking weekly cash withdrawals from a checking account for all other expenses.  In order to keep from overspending (or not to spend cash on the wrong things), divvy up your cash withdrawal and place it in several envelopes.  Be sure to write out what the money will be used for on each one—for example, food, gas, coffee, miscellaneous, etc.  Now, as you make purchases throughout the week use the cash from the envelopes.  Here’s the tough part: If you run out of money in an envelope, you’re through buying in that category until your next scheduled bank withdrawal.

 

The cash-based system is a great way to stay on a strict budget.  In no time at all you’ll begin to understand where most of the money goes and where you’re letting it leach away for things you don’t really need (or perhaps can’t really afford). The key for success, here, is to stick with the plan.

 

It’s probably worth mentioning that a system like this one won’t eliminate debt by itself.  What it can do is reduce the chance you’ll be adding more to an existing balance owed, give you a much greater understanding of true value, and show you how to stick to a strict budget.  And once you’ve mastered these, you’ll be able to start setting realistic goals to polish off those debts.

 

Looking Ahead

 

Today is a great day to start building a brighter debt-free future. Why not commit to such a future by pulling your credit cards out of your wallet and putting them under lock and key immediately?  Seriously, what do you have to lose?

 

If you enjoyed this post, you won’t want to miss:
Checkbook Tricks: Keeping A Tight Rein On Cash
Debt Relief: Two Solutions That Work
Buy Great Clothes For Pennies On The Dollar
Slash Spending: Try The Annualizing Trick
The Running Cash Flow: First Aid For Your Wallet

 

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