My Money Mistakes: The Four Times I Accumulated Credit Card Debt

I’ve made a commitment to share my money-related mistakes. These financial lowlights aren’t my proudest moments, but I hope sharing my missteps can help remove some shame and embarrassment from the topic of personal finance.

My mistake with credit cards is a series of mistakes that repeated it four times. Unfortunately, I’m not alone in accumulating too much credit card debt. As of this writing, the average American household has a credit card balance of $8,377 and has an interest rate that is greater than 12%. Consumers typically have 9 credit cards and approximately 14% of Americans have more than 10 cards. (This is far more than the number of credit cards I recommend, which I’ll cover in the next post.)

Mistake #1: Credit card debt in college. I was thrilled when I got accepted into the University of Michigan, the only school I wanted to attend. (Go Blue!) When school started, I couldn’t believe how lucky I was to be attending a school in beautiful Ann Arbor, with fascinating classes, inspiring campus life, and creative, thoughtful students.

It was also my first exposure to those who appeared very wealthy. Some students had cars that cost more than my childhood home, parents that bought them an Ann Arbor house as “an investment property,” or spent their winter break in Switzerland. My sturdy Eddie Bauer backpack seemed out of place - many of the women in my classes carried their books in Kate Spade, Fendi, and Louis Vuitton bags, which I had only seen on Sex and the City.

By the time I reached my junior year, I had accumulated around $2,500 of credit card debt. This debt wasn’t for my books or school supplies, but all splurges I felt I had “earned.” You know, because I was working so hard in school...and “all” my peers had nice stuff, too, so...

To manage the credit card debt, I ignored it and headed off to my summer internship in Washington, D.C. One evening, I was walking to the Metro when my cell phone rang. It was the credit card company, frustrated by my lack of payment. The representative offered to “charge off” my debt. I happily accepted.

Once I returned to campus to begin my senior year, I checked my credit score. It was in the toilet because of my decision to ignore my debt. I worked out an arrangement to repay the debt, which modestly improved my score. My first experience with credit card debt was a double-whammy; I accumulated debt buying things I didn’t need and did a horrible job of managing the debt. I swore I’d never get into credit card debt again.

Mistake #2: Credit card debt after moving to D.C. After I graduated, I moved to the nation’s capital and promptly racked up another credit card bill, around $2,700. I thoughtlessly swiped my credit card to buy essentials for my first solo apartment, shop for a work-appropriate wardrobe, and splurge in D.C. bars and restaurants.

Further, if I had been shocked by the wealth I saw on display in Ann Arbor, D.C. was another level. I vividly remember going to “pregame” one evening at a colleague’s apartment, which had amazing views of the National Mall. He told me it was his parent’s second home, which he’d be getting when his trust fund kicked in. This started a conversation on provisions in trust funds; I finally understood how my peers could afford their lifestyle. Unlike me, they had another meaningful source of income beyond their entry-level job.

About six months into my new job, I got my act together, stopped spending thoughtlessly, and actively sought out friends that didn’t live a lavish lifestyle. I also earned a promotion (and pay increase); all of my extra income went towards my credit card debt. I promised myself I’d never get into credit card debt again.

Mistake #3: Credit card debt after buying a home. I’ve shared the massive size and wild terms of my first mortgage. When my partner and I moved in, we left a 500-square-foot studio apartment for a 3,000+ square-foot house.

There were plenty of things we needed (fire extinguisher, household tools, window coverings for our bedroom) and plenty of things we convinced ourselves we needed (brand new furniture). Together, we racked up over $12,000 in credit card debt. This was the largest amount yet; a massive mortgage and large credit card balance made me feel trapped.

In 2006, Mr. Financier and I created a goal to eliminate our credit card debt in one year, with two $500 payments each month, diverting any “found” money to debt, and reducing three household expenses. We paid the debt off earlier than planned; I kept a handwritten log next to my bed to track our progress.

This was the most significant credit card debt I’d ever paid off, and I swore I’d never get into credit card debt again.

Mistake #4: Credit card debt following a significant raise. When I started my consulting career, I set a goal to be a Director by the time I turned 30. Colleagues in this position were generally 35 or older, but my career ambition and desire to grow my income inspired me to put my nose to the grindstone and shoot for this lofty goal. I earned a promotion into the Director position the month after I turned 30; my base salary rose to $150,000.

In End Financial Stress Now, Emily Guy Birken writes about the windfall effect. When we receive a windfall - an unanticipated bonus, or a generous birthday check - we’re more tempted to frivolously, quickly spend it. Our brains tend to compartmentalize and we view the extra money as distinct from our paycheck (which we spend more responsibly). One study on the psychology of unexpected, windfall gains concluded, “...the unanticipated nature of windfall gains is responsible for their heightened proclivity to be spent.”

I had one hell of a windfall on my hands, so I did what all responsible adults do in that situation. I rewarded myself well before I had actually saved the money to do so. Yup, you guessed it - I racked up another $3,100 in credit card debt. After the high from my shopping sprees wore off, I felt sick to my stomach. How in the world did I end up in debt, again?

It was this fourth time in debt that forced me to break my pattern. I was ashamed to be carrying a balance on my credit cards (yet again) and my debt dulled the achievement associated with my promotion. I had more than enough in my emergency fund to pay the debt off, but refused to do so, forcing myself to pay the costly interest charges as penance.

My fourth time in debt finally caused me to reflect on what habits I needed to change; there were four.

1. Watch out for life changes. I realized that I’m vulnerable to credit card debt during big life changes or times of stress. I’d feel like I “deserve” something nice and this emotional spending would push me into debt. This may not be unique to me, but since I’m conscious of this fact, I put my credit cards on lockdown when change is afoot and watch my spending even more closely.

2. Increase my save-to-spend account. I needed a cushion to fund the things I enjoy. My budget was so lean that I didn’t leave myself enough space for occasional splurges. I adjusted my automatic savings, increasing the amount going to my “save-to-spend” accounts to allow for the things I love, like shoes and dining out, that can tempt me into debt.

3. Change my shopping habits. I adjusted my shopping patterns to make myself less vulnerable to temptations. I stopped meeting up with girlfriends to shop - instead, we went to art galleries, parks, vineyards. I stopped browsing and only go shopping (online or in a store) when I have a specific item missing from my wardrobe. And, I unsubscribed from the many email lists I was on from my favorite retailers. If I missed out on a huge sale, so be it - I wouldn’t miss the possibility of subsequent debt.

4. Stop using credit cards by default. I changed my default card to my debit card, which pulled directly out of my checking account. Today, I only “allow” myself to put expenses greater than $100 on credit cards and I transfer the payment immediately from my checking to my credit card, so I can’t be surprised by large credit card bills.

I currently remain out of credit card debt and love getting zero-balance credit card bills in the mail. My money mistake with credit cards is one that I chose to repeat until I took the time to address the underlying issues. Have you struggled with credit card debt? Or, are you one of the lucky ones that excel at keeping your cards under control?

xoxo, Ms. Financier