It’s time to come, clean guys, we weren’t COMPLETELY honest when we posted about our total debt amount a while back. We wrote that we sat down for our first dreaded budget meeting and our total debt snowball amount was $134k. Well…actually it was only around $116k. Wondering where an extra $17k came from? Dave’s four most vilified words: credit cards & car loans. We started out pretty lukewarm on Dave’s plan – we like to say we waded into the pool. We slowly waded deeper and deeper as we stuck to the plan but we were nowhere near reaching the other side. On Dave’s plan, he has a few pretty stringent guidelines:
- Follow the baby steps in order
- Commit to never borrowing debt again
- NO CREDIT CARDS
We followed the steps in order but the last two we decided were more suggestions than rules. I will cover cars and car loans in another post but for today we are going to deal with credit cards.
JR and I love to travel. We have another couple we go on an anniversary trip with every year, we talk about all the places we would love to visit, and we (ok, I) love to plan out our travel itinerary the second our flights are booked. So it comes as no surprise that he and I were both proud carriers of the Southwest Rapid Rewards Visa. When we started on our plan we said no more credit cards. So we called and canceled all of them…except our Southwest cards. I mean, we need them for the points on our big purchases! We would always pay them off. We would never pay interest or late fees. We swear!
WRONG.
Fast forward to 5 months into our rice and beans debt payoff plan. A 2-week road trip with my mom and sister came up and hotels, meals, and Disneyland tickets didn’t really factor into our $200/week budget. Our friends invited us to Palm Springs for our anniversary trip – how could we say no? Slowly but surely we racked up the balance and our debt snowball was going, you guessed it, nowhere. Instead of going down the debt was going up!
We kept listening to the podcast and the phrase “the plan works best if you follow it exactly” started to thaw out our stubborn hearts. We decided progress was more important to us than airline miles. We also had to overcome an even bigger underlying problem when we had to make that last cancellation call.
The safety net.
People will run circles around Dave about the benefits of credit cards. The miles, the points, the cash back, the secure way to pay. But deep down one of the reasons we wanted to keep that little black card in our wallet had nothing to do with cheaper flights. It had to do with an $8,000 credit limit. The security that if something really went wrong, if we ran out of actual cash money in our checking account. That Chase Bank would front us the money no questions asked. Chase wasn’t going to give us a lecture. Chase wasn’t going to even ask us when we were going to pay them back. Did you know that almost 46 percent of Americans said they did not have enough money to cover a $400 emergency expense?
We decided that editing the plan to fit our agenda wasn’t working and that we needed to follow Dave’s plan EXACTLY. We canceled all our cards, committed to only paying with cash/debit cards and vowed to never borrow money again. We stopped wading into the pool and took a cannonball leap into the deep end.
We have seen substantial progress since then and highly encourage anyone looking to knock out their debt snowball to really evaluate their reasoning as to why you can’t or won’t follow the plan exactly. If you still can’t quite take the scissors to the Visa yet let’s discuss two reasons why you probably don’t want to.
Rewards
People get credit cards because they want the rewards but the truth is credit rewards are really a game, and consumers aren’t winning – not in the least bit. Rewards and kickbacks give consumers the idea that they are missing out on free money but in all actuality, it is sort of a gateway drug to spend, spend, spend. For example, you are going to buy a new mattress. You go to the store and the total is $1000. You pull out your American Express and think “cool I am going to earn $30-50 cash back on this purchase! I could go out to dinner! I could buy some new shoes!” Two things just happened. You in no way felt the pinch that one thousand of your hard earned dollars in your checking account just slipped out and went to the furniture store and the idea of the cash back earned just mentally prepared you to spend more! This is called gamification – credit card spending mentally becoming a game you are playing with the big banks. But the big banks are winning. Americans owed $905 billion in credit card debt in 2017 and paid an average of $904 in interest per year. With interest, you would have to spend over $30,166 on your credit card to net a positive income on the rewards if you had a 3% cashback card. And that is just to make $1 from those big banks.
$30,166 x 3% cashback rewards = $904.98 – $904 (average annual interest) = $0.98
Credit Score
But Kylie, I was told I need to have a credit card to build credit so I can rent an apartment or qualify for a mortgage. And yes, that is how the current system works. JR and I have differing opinions than Dave on the ease of navigating the American system of mortgages. I’ll be honest, it would have been a-pain-in-the-you-know-what to buy a house if both of us had nonexistent credit scores. So here are my two cents. If you do not have a mortgage and want to buy a house in the near future I would highly recommend at the minimum cutting up your credit cards and throwing them away. You don’t have to close them out. You just have to vow to stop using them. (Our only debt in my name is our car loan and I closed them out and my credit skyrocketed into the 800’s) You should maintain a fairly high credit score and if you have other debts such as student loans or a car payment, the underutilization of your cards will be offset by those balances. If you are debt free I would suggest reevaluating your income and your ability to save for a down payment. JR and I have the goal to pay for our next home (a flip house) with cash money! Dave’s overall goal for people is to become debt free and build wealth. A credit score is only needed if you need to borrow more money – which you shouldn’t if you are wealthy. There has also been extensive research done that shows that 100% of foreclosures happen in homes with a mortgage. 😉
One tangible project you can do is total up all your debt minimum payments, car payments, and the extra amount you pay each month. Ours was almost $2,500. It would only take us 48 months to save up and pay for a $120,000 house with cash! Talk about negotiating power!
So the best credit card for millennials drowning in student loan debt? No credit card!
Have I convinced you yet? If you are down to take the cannonball plunge, get those scissors out and cut em’ up! If you’d like more information on our debt-free journey to check out our finances and budgeting page. We have a fun set of 3 budgeting forms you can use to get started on your budget and debt snowball today. If you are interested in Dave’s plan I highly suggest his book Total Money Makeover and/or signing up for his Financial Peace University class. (We took it and loved it!)
I have been overwhelmed by the number of people who have contacted me that our posts have encouraged them to start working to be debt-free. If this or any of our other posts have helped you, feel free to send me a message, a question, or any ideas for future posts! (I respond the quickest via Facebook Messenger!) This post was inspired by one of those reader requests! All your questions and comments will remain anonymous.
Getting Started: How We Paid Off $60k in 18 Months
Download budgeting sheets here!
START HERE – Sheet One: Debt Payoff Goals
Sheet Two: Household Expenses
Sheet Three: Monthly Budget
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