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Bad Decisions Part 3b: Credit card chaos – She says

Mr. SSC’s posts on his bad credit card decisions got me thinking about what could’ve been… The best that I can recreate it from my records, Mr. SSC had $9400 of credit card debt when we got married back in ’08.  (Which is way less than the average credit card debt of Americans today at $15,480.  Here are some interesting numbers about American’s and their debt.) Anyways, let us play a game of “what-if”.  What if Mr. SSC didn’t marry his lovely wife, who was able to attack his $9400 debt like a hungry lion? What would his finances look like? How much money would MR. SSC be paying to the bank in interest?

credit card chaos

Figure 1: Estimates of how much interest Mr. SSC paid

First, let’s do some back-of-the-envelope calculations using a few interest rates of 13%, 16% and 19%… Whoa! Even at 13% APR, Mr. SSC would have been racking up an extra $1200 a year!  Yep, he would be paying the bank $1,200 a year just to borrow their money.  If instead of paying the bank this money, let’s say that Mr. SSC invested it. Assuming a modest 4% net return (7% growth adjusted for 3% inflation)*, that single lump of $1200 could have grown into $3750 by the time Mr. SSC turns 60!  That is roughly one month of our expected household expenditures…. One extra month of freedom! So, at that rate, for every year of interest Mr. SSC was paying – he could’ve instead ‘bought’ himself one extra month of retirement. If you think about the current Average American, and their debt – they are looking at just over $2000/year that they are paying in interest.  If only they could invest that money instead – it could easily pay for the household to retire a couple of months earlier! Wow!

Figure 2: Hypothetical investment return if Mr. SSC had made better decisions

Figure 2: Hypothetical investment return if Mr. SSC had made better decisions

Now, let’s try and estimate how much money Mr. SSC may have paid total in interest. You can see in Figure 1 that I’m assuming a couple of different interest rates. Over Mr. SSC’s credit card yielding bachelor days he likely spent between $5,746 and $8,398 on interest alone. Ouch!  For fun, let’s take the 15% APR case with the cumulative interest payments of $7,072 and pretend he invested that money in 2009.  Assuming my favorite 4% net scenario, by 2037 when Mr. SSC turns 60, that money could’ve grown to $21,206!  That’s FOUR months of expected living expenses for us.  But instead, Mr. SSC gave the banks his money so that he could buy fancy microbrews and other luxury items that he felt he ‘deserved’.  Shame on you, Mr. SSC!!!!

I’m not even going to try and calculate how much money Mr. SSC could have saved if he didn’t spend all that extra money that he didn’t have and the related interest…. probably over a year of retirement savings and freedom lost… sigh…

All of this makes me think about credit scores, something we weren’t even planning on writing about. It’s amazing how much damage out-of-control credit card spending can do to your credit score. Mr. SSC and I had a rude awakening regarding this in 2008 when we were buying our first house. Mr. SSC’s credit score was so low, he only qualified for a pretty horrid mortgage rate. Even if I was the joint applicant. (This was early in the year, before the financial crisis – if it was later in the year after everything crashed, there would be no way Mr. SSC would’ve qualified for a mortgage at all.) Luckily, we weren’t yet married, so I had to buy the house and get the mortgage by myself, then add Mr. SSC onto the house paperwork after I bought it. My parents were absolutely horrified that I was buying a house with my money, and then adding Mr. SSC to it, before we even got married. They were certain he was going to run off and take all my savings. Fortunately – he proved them wrong!

In any case, Mr. SSC’s situation with credit card spending could be much worse. There are so many people that continue to spend, spend, spend, and may never understand the hole that they are digging themselves. Maybe it is easier to ignore the problem that fix it. Honestly, I try and try, but I can’t understand the mentality of all those people who willingly put themselves into debt. To me, debt feels like I’m wrapped in chains, so I avoid it as much as possible. It even took me a while to get comfortable with having a mortgage.



*Just a note, I may not mention it, but I always take inflation into account, readjusting the future dollar back to today’s dollar… its easier for me to comprehend that way.  And I typically use 3% for my inflation calculations.

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