If you’ve been following this blog for any length of time you’ve probably noticed that you can just read the title of most of my blog posts and get the basic lesson.  This particle article is no exception.  It will eventually get around to me pleading with you to pay off your credit card, whether you’re a kid or not.

It’s fairly common for bloggers to summarize their posts with “Key takeaways” at the end of the article.  Maybe that’s because they figure people will be forced to read their entire article if they want to learn that sweet, sweet takeaway advice.  They know people can just scroll to the bottom right?  Either way, I’ve done you guys a solid and just put my main point in the title of the article.

Key Takeaway:  Pay off your credit card, in full, each month.

Also key takeaway: My niece is freakin’ adorable. Here’s another cute and/or slightly terrifying picture of her holding a credit card because I couldn’t choose one.

 

If, for some reason, you didn’t believe that was going to be the main point of the article I went ahead and posted a slightly extended version of that point as my first heading. Go on, scroll right up and reread it for yourself.

If you’re still reading this article I appreciate your stick-to-itiveness, which is apparently a real word.  I had to google how to spell it.  I will therefore reward your patience by getting into the meat of the article, which, again, will conclude with me telling you to pay off your credit card, in full, each month.

Lamentations of Finance Writing

Lamentations is a book in the Bible where the author bitches about everything being meaningless.  At times I struggle with just how meaningful blogging about finances really is.  What did I have to teach the world that they couldn’t already get from their subscriptions to Rockstar Finance or Go Curry Cracker?  Is the world any better off with my take on finances, health and general life musings?  I wondered…

But then!  I was talking to a real human about life and they were telling me about how they had their metaphorical house in order as they were able to comfortably make their $50/month minimum credit card payment.

“Aha!” I said aloud, “There are fools everywhere.” I threw off my regular life hat and replaced it with my specially embroidered Burrito Bowl Diaries super hero looking hat.

“Where did you get that hat?  You follow a food blog?” my friend replied.

“Never mind that,” I said. “We have more important things to discuss.  Why are you only paying the minimum on your credit card?…

…What’s your interest rate?”

“I don’t know, like 19%.”

“I want to vomit and slap you,” I said with the love and care you should always have when addressing your grandmother.  It wasn’t my grandmother, just so we’re clear.

“You should not just pay the minimum,” I said.  “You’re wasting lots of money just paying the interest.  Do you know how much principal you’ve paid and how much you’ve flittered away unnecessarily?”

“I prefer not to look.”

“Ok, well what’s your balance?”

“Like $1000.”

“Get out of here.  Stand up and get out of your own house,” I said.  “Pay off your credit card like your pants are on fire!  What’s wrong with you?!” I began shaking him lovingly at the shoulders until his head jostled about.

“But, why?” my money wasting friend stammered through his mildly concussed head.

“Because of math,” I said.  “Look, you can buy more dumb stuff if you’d simply pay off your credit card balance each month.”

“How so?” he asked.

“Well, if you owe $1000 on your credit card and you pay it off immediately, then you’ll only end up paying $1000.  If you pay the minimum $50 payment each month, only $45 is going towards the $1000 you owe.  The other $5 is basically just wasted into the ethers.  It’s a penalty you pay for not being smart enough to pay off your entire balance.  In the long run you end up paying closer to $1200 for that $1000 bill.  So the real cost to you is actually $1200, not $1000.”

Now, to be fair, this wouldn’t be so bad if it happened in a vacuum.  The problem is people do this month after month.  Eventually they owe so much in minimum payments that they’re underwater and feel they have no hope for ever getting out of debt.

My friend nodded his head and rubbed his neck in agreement as if he’d been karate chopped with truth.  And also I probably shook him a little too hard.

“Gee, thanks Mister,” I’m pretty sure he said.  “I’m going to pay off my credit card balance right away.”

I gave him a heroic wink and did the finger guns thing then stood there facing the sun with my hands on my hips.  There may come a day when the world no longer needs another finance blogger with questionable tactics and minimal experience, but that day isn’t today.

If you feel you've learned the lesson just go ahead and share this article now.  If you'd like to read a boat metaphor comparing debt to water inside your boat then keep reading.

Here’s a Metaphor about a boat.  Who doesn’t love a boat?

There you are, out on the lake, in a boat.  It’s a beautiful day and you’re really enjoying the well earned relaxation that miraculously floating on water can provide.  It’s just you and an empty, perfectly floating boat.

After a while you start to get bored of just sitting on the water so you start adding things to your boat to help entertain you.  Each item you add puts more weight on your boat and makes it sink down a little further into the lake.  Soon you have enough weight that water is starting to creep in over the sides and your boat slowly starts to fill.

That’s how credit card debt is.  It’s like being in a boat that’s slowly filling with water.  Paying the minimum on your credit card is akin to bailing out just enough water so your boat doesn’t go completely under, but not enough that your boat gets dry.

Bailing out the minimum amount of water needed takes only minimal effort, so you don’t worry about it.

You’re enjoying the lake and the sun and you don’t want to concern yourself with spending all your free time just bailing water.  Bailing water is no fun.  You’re on the lake to enjoy life.  Intellectually you know when you only bail out the minimum amount of water necessary it will take you longer to get out of trouble and you’ll be doing way more work in the process.  It doesn’t matter though, because, for right now, you’re enjoying the sun and only bailing out water when you need to.

As the day goes on you get bored of the things in your boat so you find more toys to increase your enjoyment on the lake.  You add a cooler filled with drinks, some friends, an umbrella, all good stuff.  Each item you add to your boat increases the weight and allows a little more water access to your boat.

The minimum amount you need to bail out gets a little larger with each item.  Soon you no longer have the joy of whatever you bought, but you still have to pay for the weight of it.

That minimum amount of bailing is no longer minimal.

In fact, it takes everything you have to bail out the minimum amount of water needed to keep afloat.

Before long you aren’t even enjoying the lake because all your time is spent bailing water.  Instead of selling off what you have, you keep adding more toys, trying to distract yourself from the fact that you’re slowly sinking.

So the moral of the story is pay off your credit card balance entirely each month.  If you don’t, the balances from each additional months spending will keep growing and building on itself. One day you will no longer be able to pay the minimum and your life will fall apart.  If you can’t afford to pay your credit card off entirely than you’re probably buying stuff that you don’t need.

But What About Cash Flow...

Read this part if you're thinking to yourself that I'm forgetting about the power of cash flow.  If the idea of not paying off your credit card debt because you want to maximize cash flow never occurred to you, just skip this section.  

I will briefly get into the argument that it's better to only pay the minimum because it gives you more cash flow.  This argument has been waged for a multitude of bill related topics, not just credit cards.  If you have a locked in 0% forever interest rate, sure.  Paying the minimum is typically fine.  I prefer to pay off the entire debt because I don't like to owe anyone money, but that's just my personal preference.  

The other 99% of the time you are going to be paying interest.  The example below will be for credit cards but the same principal applies whether you're talking personal credit cards or a strategy to pay off business expenses.  

Let's say your monthly  bill comes to $1,000 and you have $1,000 that you could use to pay it all off.  The minimum payment is $50.  The argument here is if you only pay the $50 minimum payment then you'll have $950 left over to spend.  

This argument makes sense if you're viewing your life in one month blocks where the months before and after don't correlate to your current month, and overall financial situation.  If you only did this minimum payment option one time then sure, you'd have $950 to spend still.  

The problem is when people do this month after month.  In January you rack up $1,000 bill and only pay $50.  Great, you still have $950 to increase your business or buy more cool things.  In February you do the same thing.  You rack up a new $1,000 of debt and only pay the minimum.  Now your minimum payment is $100 per month and you owe $1900 +interest.  

You keep doing this month after month for a few years.  Your total owed keeps increasing because each month you only pay off 5% of the total purchases.  Your minimum payment also keeps increasing until eventually it's close to the initial $1,000 and the total you owe is over $20,000.  At this point you're paying a ton of interest and only a little bit of principal.  

Do you stop there, or do you keep the cycle going?  How do you know when it's time to start paying larger chunks of your debt off each month?  If you keep going your debt will become like a whirlpool and you'll be circling the drain.  You keep paying the minimum payment because that's now all you can afford.  You still spend because, for now, you can afford the minimum payment, albeit just barely.  

At some point you can no longer afford the minimum payment and you realize you're drowning.  If you're running a business hopefully your profits are enough to cover the amount you've been spending.  If you're strictly a consumer then you have basically nothing to show for your years of accruing debt.  

Unless you plan on never actually paying off your debt (that's a whole other topic) it makes way more sense, from a math, and stress standpoint, to pay off your entire balance each month.  

Paying off your credit card debt entirely each month also safe guards you if you ever lose your job.  You can always cut down on expenses on a month to month basis.  You can eat ramen noodles and even move out of your apartment if you absolutely have to, but you can't escape your previous debt.  If you owe a ton on your credit card you still have a huge monthly expense regardless of whether or not you accumulated any new debt.  

The only time you should be thinking of paying the minimum is when you physically cannot pay off the entire bill.  This should be sending alarm bells shooting through the halls of your head.  It's ramen noodle time.  If you can't pay off last month's credit card bill you should be fighting tooth and nail to spend as little as possible this month.

“Mr. Burrito Bowl I’m in so much debt, paying it off in one month is laughable.”

Right.  So we’re on board with the idea that you should pay off each months purchases before you start the next month of frivolous spending.  None of us want to be in a sinking boat.  So what do you do?

The first step is to stop distracting yourself from the problem.   Look the problem dead in the eye.  You need to stop adding weight to your boat.  Ask yourself why you feel the need to keep adding more weight to your boat. This exercise isn’t meant to shame you, it’s just meant to help you understand your compulsion to keep adding weight to a clearly sinking boat.  Is the added weight increasing or decreasing your overall satisfaction?  This might mean answering some tough questions about yourself and re-evaluating what makes you truly happy and why.

Focus on long term happiness, not short term pings of excitement.  

Next you need to look at what weight you already have in the boat that you no longer get any joy out of.  Unload that weight.  You won’t be able to get back what you put into it, but get what you can.  If it doesn’t bring you joy, sell it.

People hold onto dumb purchases because of the sunk cost fallacy.  They feel they've put too much into something to just let go of it.  The truth is you've already spent the money.  If it brings you zero joy, even getting a single dollar for it would be better than keeping it and getting nothing.

Next, attack the water in your boat.  Paying the minimum on your credit card is for suckers.  Buckle down and pay it off.  You’re lying to yourself if you’re going out to eat, buying new clothes, and taking exotic vacations, but telling yourself that you don’t have the money to pay off your debt.

This headline is to break up this section so it’s not an overwhelming length

Getting rid of debt isn’t a forever thing.  You’ll be able to take vacations again and buy new clothes and do everything you want to do, just not right now.  Right now you’re concentrating on getting that water out of your boat.

Once you start to gain some momentum you’ll notice your boat is getting lighter and lighter.  You don’t have to scramble so hard to keep your boat from sinking.  Don’t stop there.  Keep working your ass off to get completely rid of the water.  Complacency about having water in your boat is what got you into this predicament to begin with.

As your boat starts to raise above the water you need to ask yourself which is more fulfilling:  Having a boat that floats or having a bunch of cool stuff in a sinking boat?

You’re exhausted but you feel great.  Your sinking boat is now floating above the water and you can finally look up at the sky and fully enjoy the day.  You never noticed before how much that low-grade stress of knowing you had to bail some water every few minutes was affecting you.

Happiness isn’t having a bunch of cool heavy distractions in your boat.  Happiness is looking up at the sky and floating, stress-free.

Key Takeaway: It’s best to pay of your credit card, in full, each month.

The reason for this is the sooner you pay off your principal the less you’ll be paying towards interest.  Paying interest is just wasted money.  When you continue to purchase things without paying them off you’re on a crash course to eventually just paying interest.  Before long you’re in a sinking ship of debt.  Don’t be in a sinking ship of debt.  Pay off your credit card, kid.

If you enjoyed this article please share it with your friends and enemies.

Here’s a few more financial articles, if you’re into that sort of thing.

1. Financial Independence and the Art of Travel Hacking
2. The 4% Rule- How to Know When You’ve Reached Financial Independence
3. Becoming a Millionaire and Achieving Financial Independence