Credit Card Debt Management

Every once in a while, I am reminded of just how firmly entrenched in the 21st Century my two-year-old is. Take, for instance, the time he pointed to a framed gold record on the wall of Hard Rock Cafe and called it a “big movie.” Or the moment he decided that daddy was no longer at work to “make money,” but he was instead “making cards”. That’s when it hit me. This kid sees his father, mother and everybody else swipe cards in the checkout line. In our case, it is primarily debit cards, but he gets the concept that plastic is king in this world. Oh boy, do we have a big responsibility.

I am a firm believer that it’s never too early to start education on the basics of life. We’re working on getting our toddler to chew with his mouth closed. Seriously, and it’s working. We also have a money jar where he can save his cash, watch it accumulate and spend it eventually. This is a very rewarding lesson in savings, as the highly visual 2-year-old loves to watch his jar fill with coins he found in the cushions, the car, the floor, my purse and pockets. It does seem, however, that this money jar will in the very near future be a completely irrelevant and inadequate means of financial education. How soon can we set him up with a debit card?

Millionaire Mommy Next Door has some great tips on how to make money management a family affair. The post talks about our recurring theme that the education system has largely failed to implement formal financial education for high schoolers, so parents, the ball’s in your court. While the MMND blog has some great, practical advice for financial management, it shies away from credit cards.

Regarding plastic, check out my post on how to build a teen’s credit history. Each of the four credit building techniques described there will also serve to educate kids on things like payment due dates, late fees, credit limits, over-limit fees, interest charges, etc. Elementary-aged kids might benefit from parents putting grocery money on a gift card and the entire family can team up to ensure that grocery spending stays within those bounds. This helps kids grasp the concept of needs vs. wants, delayed gratification, budget-conscious shopping and spending limits - all very important lessons for an up-and-coming responsible credit card user.

Some parents may want to tell their kids to avoid credit cards altogether. I have come to realize this is simply not practical. Just like you have to talk to them about weightier issues like drugs and sex, you have to talk about credit cards because eventually someone is going to offer them a credit card. Parents just want their children to fare even better than they themselves and avoid making the same mistakes. But when I was 18, I thought my parents were about the most ignorant, uncool people on earth (now I know different). I didn’t listen to them! So instead of telling kids to “just say no” to plastic, make sure they are learning the mechanics of how it works and how it can work to benefit them. Teach it with your words as well as your example.

We’ve discussed the Utah State University study that showed debt has a tremendous effect on the health of a marriage. Another interesting highlight from the study was the fact that couples with a high school degree only were more likely to bring debt into the marriage than couples with a college degree.

According to the Journal Extension publication of the study:

We found that 24% of husbands and wives in the study with a high school degree brought no debt into the marriage, whereas, 36% of husbands and wives who had at least a bachelor’s degree brought no debt into the marriage. …other research shows that, on average, college graduates earn more money than high school graduates. Therefore, college graduates may have been better able to pay down their debt prior to marriage, even if a portion of that debt was a result of paying for their college education. It may also be that college graduates, through their coursework, are provided with more opportunities to gain knowledge about finances and debt management than high school graduates who marry.

Is this fair? This is further proof that students need a better education on all things financial - especially credit cards - before they graduate high school! One might think couples with college degrees might be more likely to bring debt into the marriage because of student loans. However, this type of debt made up only 23 percent of all the different types of debt brought into marriage, ranking it third. The top two types of debt brought into marriages were automobiles and credit cards at 55 percent and 48 percent, respectively.

So here we have a study showing us that debt has a profound effect on marriage and more debt is brought into marriage by high school graduates. There has been a historic and persistent lack of instruction on all things financial (and particularly debt management) within the education system. And we wonder why the divorce rate is so high? Money fights are most common of all marital fights, according to the study! It is time for teachers and parents to stop shying away from money talk and instead make money management the new conversation topic du jour.

It is tough when you combine households with another, particularly if you’ve become used to doing things your way. There are few areas where this tension can be more evident than in the area of finances. That is why a Utah State University study found that money is the most frequent cause of marital fights, and marital satisfaction is directly linked to debt levels. Behind automobile loans, the most common cause of newlywed debt is credit cards.

The FILAM Personal Finance Blog has some excellent money saving ideas for newlyweds, to help them win the financial war together as a team. Some of the best suggestions:

Always keep track of your credit card bills. This will help you understand your position as a couple in the war on debt. Maybe you can’t pay your balance off each month. Maybe that is an absolute pipe dream because your balances are so sky high. Still, your marriage will benefit from keeping debt manageable, and keeping track of your bills is a good way to do that. It also sheds light on when interest rates have increased or credit limits have decreased. A savvy credit card consumer needs to stay on top of these things.

Prioritize debt. This goes back to keeping debt manageable in an effort to sleep better at night and enjoying a less stressful marriage. There are basically two schools of thought on this. Some prioritize debt based on interest rates, to eliminate the higher interest debts first and spend less money long-term. Others will continue paying the high-interest debt while they pay off the debts with the smallest balances first. There is a psychological principle at work here that builds momentum and encouragement as a couple pays off this small debt, then that debt, then the bigger debts. Choose an approach that works for you and your significant other, and then stick to it.

It is important for both parties in a marriage to care about the financial health in the future, because they both stand to lose or gain. It is important for both to have at least a working knowledge of the household budget, monthly income, cost of living. This is important because the financial management could suddenly fall to one person at some point in the future due to illness, death, or long-term travelling, like with the military. Although happier marriages are typically associated with lower debt levels, there can also be great happiness in having a lot debt, as long as you are whittling away at it together as a team.