Living Large on Credit Cards Leads to $35,000 in Credit Card Debt
In his 20’s Kamal treated credit cards like free money, but the result was a debt problem he couldn’t eliminate on his own.
Kamal’s story may sound familiar. When he was in his 20’s living in Atlanta, he wanted to maintain a lifestyle that was beyond his means. Instead of scaling back, Kamal started relief on credit cards to cover all the high-end expenses he really couldn’t afford. He admits that he had the wrong attitude when it came to credit card debt. And even just a few years of living large led to a debt problem he couldn’t handle on his own.
Kamal acknowledges he was a reckless spender…
“I went to the mall almost every day. I bought clothes and other stuff I honestly really didn’t need. I also went out to eat all the time, and I wasn’t going to McDonald’s. I went to some pretty expensive places and I’d always use my credit cards to pay.”
Kamal says being able to look like a big spender made him feel good. He’d constantly treat his friends without thinking about how much debt he was taking on.
“I would take a bunch of people out for dinner and drinks. They’d order all kinds of expensive food and cocktails and bottles of wine. And I never blinked. I would just pay the bill with one of my credit cards.”
Kamal also supported his car habit on credit cards…
Kamal’s reckless spending didn’t stop at dinner and drinks. He also covered the down payment on credit cards for a string of new cars.
“Almost every time Infiniti or Acura would introduce a new model, I would go get one. I would trade in my old vehicle – which was still basically new – and then I would put the down payment for the new car on my credit card.”
This is a risky financial habit that’s really not good for your finances. As Consolidated Credit’s President Gary Herman explains, the purpose of a down payment is to avoid debt, not to create it.
“The purpose of a down payment is to pay off as much of the purchase price of a vehicle as possible,” Herman says. “The more you put down, the less you have to pay off on a loan. This decreases your monthly payments, making it easier to afford the vehicle. But if you’re putting a down payment on a credit card, then you’re basically robbing Peter to pay Paul. Instead of limiting the debt you take on from the auto loan, now you’ve added high interest rate credit card debt to pay off, too.”
This strategy ended up costing Kamal money. Auto loan interest rates tend to be between 4-6%. While the average APR on a credit card is closer to 16-18%. This means that although Kamal’s auto loan was smaller, he basically traded in auto loan debt for credit card debt. Since the APR is higher, that debt cost Kamal more each month. This is why experts advise that you should avoid using credit cards to cover car down payments. It may reduce your monthly payments, but it’s essentially covering up that you really can’t afford that vehicle.
At a certain point, Kamal simply couldn’t afford his bills…
One of the challenges with credit cards is that they create a revolving debt. The minimum payment requirement increases as your balance increase. Usually, that increase is gradual, but for Kamal, it came on quickly. Trading in cars every few months, Kamal ran up big balances quickly, buying nine cars in two years.
Then he realized that he couldn’t afford his bills. He started juggling payments and many of his accounts went to collections.
“Credit card collection departments were calling me constantly. They’d ask why I was only making minimum payments or why I missed a payment. And I didn’t know what to tell them. I didn’t have any answers for them”
Kamal knew he needed a solution to avoid bankruptcy…
“I wanted to keep my dignity. I didn’t want to go bankrupt.”
Luckily, Kamal had a friend that had gotten stuck in a similar situation. They told him that they’d used Consolidated Credit. So, Kamal made the call.
Kamal admits that at first, it was tough to make the adjustment. Since his total debt was so high, Kamal’s initial monthly payments were $900. But his credit counselor helped him make a budget, so he could meet those payments every month. He learned to cut back and live within his means.
“It was easy during the early year when I was paying $900 a month. But as time went on, the monthly payments were reduced. And Consolidated Credit helped push me to maintain the discipline it takes to pay off such overwhelming debt. They were always there when I needed them.”
Kamal became debt-free in less than five years…
“It took me six years to run up $35,000 in credit card debt, but with the help of Consolidated Credit, I was able to pay it off in less than five. I honestly thought I’d never get out of debt, but I did.”