A while back I had a discussion with a friend on MSN over credit cards and he asked me how much I owed on my Visa. When I told him my current balance was over $12,000 he exclaimed “Oh man! You have a debt problem! I only owe $2,500.” I asked him if he was going to pay the full balance off when the bill comes. He replied no, that he was making $300 to $400 a month payments on it and hopes to have it paid off in 7 to 10 months (assuming he doesn’t keep charging on it). He then asked me what kind of payments I’m making on my Visa bill. I replied “$12,000.”
The size of someone’s debt doesn’t tell you if that person has a debt problem. I have a friend who charges over $100,000 a month on his Amex. Does he have a debt problem? Not at all. He pays off the full balance when the bill comes. I have a really simple way to determine if someone has a debt problem.
You Have a Debt Problem If You Can’t Pay Off Your Credit Card Balance
Sounds really simple doesn’t it? It’s not the text book definition of a debt problem but it’s mine. Everyone knows that running a credit card balance is bad, so it stands to reason if you have to run one, you’re in a bad situation and therefore have a debt problem.
What about those “low interest” credit cards? Does it apply to those when you run a balance? The answer is yes. Almost 100% of the time, a credit card is used to buy butter. That in itself ranks the debt as bad. And if you can’t pay it off when the bill comes then it’s really bad because you are now living beyond your means.
Almost 50% of people with credit cards run a balance. If you’re among the 50% that fell into the credit card trap, then you need to take your credit cards, put them in a cup of water and freeze them. You’ll never fix your debt problem if those cards are in your wallet. I am not against credit cards. I love them and can’t live without them. However, I always pay them off no matter how high the balance gets. The smart use of a credit card is a very powerful tool. But like all tools, it can be abused.
Having said all this, I will say that at the end of the day, people who run credit card balances don’t really have a debt problem. They have an income problem. But that’s for another blog post.