Credit card debt is not a monkey on your back, it’s a gorilla

Season’s Greetings! As we embrace the chill in the air and the warmth of festive lights, I find myself reaching out to you earlier than expected. A friend's recent struggles deeply moved me as I had not faced a similar situation in my own life. It’s a story that I felt was important to share before the holidays. 

Cancer sucks, even more so if you don’t have significant savings
Recently, I reconnected with a friend whom I hadn’t seen in several years. Despite having never smoked, he had endured a daunting battle with lung cancer. Thanks to the miracles of modern medicine, he is now in remission, but this victory came at a steep financial cost. The illness sidelined him from work for almost two years forcing him to deplete his savings to cover medical bills. As his savings dwindled, he found himself depending on credit cards. 

The toll wasn’t his alone. His daughter put her career on hold to care for him. When his credit cards had maxed out, she too found herself relying on credit cards to make ends meet. Today, they are both healthy and working again, but he is not able to manage his everyday expenses while keeping up with mounting credit card debt. He asked if there was anything we could do to help.  

Credit card debt is debilitating
Let’s take a closer look at their finances. My friend and his wife bring in a combined income of $6,000 per month while his daughter contributes $4,000. Their monthly expenses including rent, car, taxes, insurance, food and miscellaneous expenses are approximately $8,000. In an effort to identify potential savings, I reviewed their credit card statements. They were not living a life of luxury. After covering living expenses, they were left with $2,000 in “savings” each month.

In just  three years, their credit card debt had snowballed to an overwhelming $45,000 across ten different credit cards. Initially, these cards offered relief with manageable interest rates below 10%. Once the promotional periods ended, the interest rates jumped to between 26 and 29.99%. The minimum payments, which barely pay down the principal debt balances, alone on these cards came to $2,000 per month. Here’s the stark reality of their situation: each month, their $10,000 income was consumed by $8,000 in living expenses and $2,000 in minimum payments. They were trapped in a vicious cycle where they broke even at best, leaving no room for savings or to make any significant dent in their credit card debt. 

Each day their financial situation deteriorated further as their credit card debts accelerated at an alarming pace. Of the $45,000 in credit card debt, more than one third was purely accumulated interest. They had borrowed less than $30,0000 but that had ballooned to $45,000.  With 30% interest rates, their debt would double every 2-3 years. In 5 to 6 years, the $45,000 of debt would surpass $200,000!

Do everything in your power to not get into credit card debt
Before I discuss how we helped my friend out of this hole, let me make a PSA. Escaping the grip of credit card debt is an arduous journey that requires either a significant increase in income or material drop in expenses. Neither option is easy. Credit card companies are unlikely to write off debt until you have ceased payments, the account is in collections or declared bankruptcy. While this is easier said than done, the best way to get out of credit card debt is to not get into it in the first place. 

For those navigating significant credit card debt, prioritize paying it off quickly. While it’s a daunting task, the longer you wait, the more pain you will have to endure. Life is unpredictable and unforeseen circumstances, such as illness or injury, will quickly turn existing debt into an overwhelming burden. It's crucial to have open conversations about this topic with your family, friends, and even employees. Educate and assist them in developing a plan to tackle their debt. A proactive approach will prevent even greater hardships in the future. 

Pay off credit cards this holiday season
If you're wrestling with credit card debt, this holiday season might provide an opportunity for progress. When receiving gifts, consider returning them and redirecting the funds to debt repayment. When it comes to your own gift-giving, opt for budget friendly options or sentimental gestures, allowing you to allocate more resources paying down credit cards. Reimagine vacations as staycations, turning potential expenses into opportunities for savings. If you know someone struggling with credit cards, offering financial assistance could be a profoundly meaningful gift. 

What did my friend do?
Over the past 20 years, we have helped a number of friends, family and employees navigate their way out of debt. With one exception, our interventions have been successful. My parents too have a long history of generously assisting their friends and family, albeit with varying degrees of success. What made the difference in these interventions? Why did some succeed while others did not? In the next issue, I will discuss these insights as well as the solution we implemented for my friend, along with strategies you can use if you decide to assist friends in similar predicaments.

If you have any questions, feedback or want to catch up live, please don’t hesitate to reach out. Wishing you a Happy New Year filled with prosperity and good health!

Sangeeth Peruri - Jack of Many Trades, Master of None
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