How much is too much?
July 13, 2008 3:02 PM   Subscribe

How much credit card debt is too much?

I'm a freelance guy in the arts at the beginning of a big (read: expensive) personal project which will almost certainly NOT earn me my money back, although it is definitely related to my work. I have a good new job coming up in a few months which, while there are no guarantees, looks likely to provide me with steady work for some time to come. As such, I'm considering relaxing my usually strict credit card practices, in order to better complete my project. I'm not sure how far I should go with this. Mind you, I'm not talking about trivial purchases (expensive dinners, clothes, etc) - things that will directly (albeit luxuriously) help me practice my craft. So - am I just rationalizing my desire to go on a spending spree? Do you have any personal rules of thumb that govern your credit card usage?
posted by anonymous to Work & Money (34 answers total)
Credit card debt is too much if you cannot pay the balance each cycle. Period.
posted by i_love_squirrels at 3:07 PM on July 13, 2008 [14 favorites]

>How much credit card debt is too much?

In an ideal universe, $0.00. You should work to achieve this as a long term goal. You won't regret it.
posted by Gordion Knott at 3:07 PM on July 13, 2008

Yeah, nthing. With the possible exception of emergencies, any credit card debt that you don't pay off in full at the end of the month is too much credit card debt.
posted by Flunkie at 3:09 PM on July 13, 2008

am I just rationalizing my desire to go on a spending spree? Do you have any personal rules of thumb that govern your credit card usage?

My rule of thumb is any debt you can't pay off that month, or don't have a concrete plan to pay off is too much debt. Granted, this is extreme compared to many of my peers, but I'm not getting any feeling that the debt you want to go into is something you have the assurance you'll be paying off soonish. If it's something you need for work, I guess I'd think about whether it's a potential tax write-off because that will soften the blow a little, but generally speaking going into debt for something you yourself describe as "luxurious" sounds more like rationalizing than plan. Or, put another way, if you wind up with a debt problem you could wind up having to take freelance projects you DON'T LIKE just to pay that debt down which might not feel so good.
posted by jessamyn at 3:11 PM on July 13, 2008

If you can't afford it, don't buy it.

You will find that there are plenty of things - medical expenses, car repairs, extra costs of gasoline when it doubles in price, legal bills - all the little trivial unanticipated things of life - which you can't afford and will have to buy anyway. It is easier to pay for those things if you didn't already spend a lot of money on the things you couldn't afford and could have done without.
posted by ikkyu2 at 3:14 PM on July 13, 2008 [4 favorites]

If you cant pay it off that month then dont do it, unless its an emergency.

The worst thing that can happen to you is saying "Well, Im 2 grand in debt and Im not paying it off, so whats another 2 grand?" Next thing you know youre in serious trouble. At 20% interest even the minimal payment is punishing.

Each household in America carries around 9 grand in debt. Thats the average. Theres no shortage of households with 10-15k debt. Those people might never get out of debt. Imagine that.

BTW, at 18.9% and a minimum payment of $170 dollars a month, you'll be paying almost $25,000 in just interest. If you dont have 8k laying around, you certainly wont have 25k in a couple of years.

Just get a second job if you truly need money. You can make some decent cash bartending/waitering but its not easy work.
posted by damn dirty ape at 3:23 PM on July 13, 2008

If you carry a balance, you have too much on your credit card (unless you're so rich you've got money to burn).

> am I just rationalizing my desire to go on a spending spree?


> Do you have any personal rules of thumb that govern your credit card usage?

I try hard to only spend what I have because I'll have to either pay off the credit card when the bill arrives or watch the amount I owe increase every month. Credit card interest is a killer.

The thing to remember about credit card purchases is this: if you buy something, the price you paid is a lie unless you pay off the card when the bill arrives because, thanks to interest, the price of what you bought keeps going up. Let's say you buy a new laptop for $2,000, but you put it on a credit card and carry the balance to pay off over time. You could easily end up paying $2500 or more for that laptop.

I watch friends of mine as they wait for a sale to buy something big - but then they put it on a credit card they don't pay off, which means they end up paying far more than full price for the thing they waited for a sale to buy.


Don't get me wrong - I have two credit cards (a Visa and a Discover), and I use them. I just save in advance of making a big purchase, then I put it on my credit card and pay the card off when the bill arrives.
posted by 2oh1 at 3:27 PM on July 13, 2008 [2 favorites]

My personal rule of thumb is no CC debt at all. I'm actually a bit more extreme than that, but that is another discussion. I second the damn dirty ape, get another gig part time, or full time until the other job arrives and then do the project out of your SAVINGS.
posted by HappyHippo at 3:39 PM on July 13, 2008

I have a good new job coming up in a few months which, while there are no guarantees, looks likely to provide me with steady work for some time to come.

I can guarantee that your creditors will demand payment regardless of what happens and bilk you in high interest. If you take on this kind of debt, it will mean that any hiccups to the next job which delay your paying off your debt will cost you big time. Really, any woe between now and then (and there's bound to be something) will be multiplied manyfold. Between (small negative) and (modestly positive) amounts of money your worries are pretty much the same, but if you get any trouble and it pushes you into (modestly negative) or worse it'll be very expensive to get out of.

Depending on the amount, you might be able to get a small loan elsewhere which will have less soul-crushing terms. Maybe
posted by a robot made out of meat at 3:43 PM on July 13, 2008

I worked for an artist who used credit for an entire year at a time (keeping his cash available for unavoidably-cash expenses like rent), and then paid off all of the debt and interest when he had the gallery show and sold the art. Many filmmakers do the same thing, of course. Most people here will have zero tolerance for debt because that's surely the wise and practical thing to do. But many creative people find they have to use credit to finance projects at the right time.

Some notes:
- Apply for grants. I got $2500 for free this year.
- Look into a friendly loan from family instead of using credit.
- If you must use credit, I found the best way to do it is to buy everything you need the first month, then pay off that statement with a 0% credit card, so that you simply hold the purchases without interest until you're ready to pay. (Make sure the 0% promotion period lasts long enough for you to return to work and amass that money! And make sure you can pay the minimums -- even 0% cards have minimum monthly payments.) When paying off that first statement with the 0% credit card, you can sometimes overpay, too. Say the original statement was $1000. Use the 0% card to pay $3500 to the original card. Now you're holding $3500 at 0%, and you've got a negative balance of $2500 on the original card that you can put some purchases on without a bill coming due.

I have done this sort of thing many times, but you should know that I'm also one of those perfect-memory types with obsessive to-do lists and very strong organizational skills. I've never paid a bill late, my credit score is above 750, and I don't even lose bobby pins. So if you're not this type, the credit path might be too risky for you.
posted by xo at 3:45 PM on July 13, 2008

If the subjective value of having something for X months is greater than the interest paid for X months, then using a credit card is a good decision.
posted by mpls2 at 3:46 PM on July 13, 2008 [3 favorites]

Tell us more about this "personal project." You say it won't earn out, yet it is "related" to your work. If by "related" you mean that you can reasonably expect to enhance your earnings, it may be worth it -- a long-term earn out. The interest rates and non-deductibility of the interest make credit cards an expensive source of educational capital, but that doesn't mean that they are always too expensive.
posted by MattD at 3:49 PM on July 13, 2008

Only you can decide. If you think you can pay it off quickly, then it might be ok. But the best possible way is to wait until you actually have the good new job, and can set aside the money to do the project. When the cash in your hand runs out, so does your purchasing. With a credit card, it's very easy to go over budget, because the funds are available to you. Fill in your favorite old saying, but "don't count your chickens before they hatch" works well in this case. Many things can happen before you start the new job. I am old enough to have lived through countless "for sure" situations that have turned around and bit me on the arse.

Unsolicited but related rant: I'm unusual, especially for a middle-aged man with a good job in that I have no credit cards. I only have a Visa debit card tied to my checking account,. I have $500 overdraft on the checking account. There are many times I found myself in a tight spot, and wished I had a credit card to bail me out "just for now." But guess what: I made it through somehow. Maybe not as comfortably as I would have liked, but I managed. Many times that meant simply doing without something until I could pay cash.

But, when I balance the few times I think I regret not having one, against the great feeling every single day of not being in debt, and not having to make credit card payments, I'll take the latter any time.

Yes, it's possible to use plastic responsibly. And you may even need it to build a credit history in order to get a mortgage or car loan. But it's too easy to think of your credit limit as "free money" and that mindset is encouraged by the industry. (Case in point: the "I want it all" TV ad for the Chase credit card; you can check your available credit in order to buy the most bigass new TV possible when your old one breaks! Yay)

Good luck on completing your project! I hope you ca find a way to get it done without undue financial strain.
posted by Fuzzy Skinner at 3:50 PM on July 13, 2008

Credit card debt is OK for true emergencies. As in, your car exploded and you needed credit to make unforeseen repairs. And then you pay that off in a measureable way. As in, you set strict savings goals so that the balance is paid off in X time.
posted by Cool Papa Bell at 3:52 PM on July 13, 2008

It's a risk thing. I have worked with several successful artists that acknowledge that without some initial credit card debt they would have never been able to get started. On of them referred to her visa as her patron.

So take that as you will. Everyone here is right, though, no credit card debt is of course the goal. I have been working through one credit card or another for four years and just now am I seeing the end in sight. Arguably, though, I wouldn't have finished college or been able to have the steady paying job I do now if I hadn't taken some risk and used the credit card to fill in the gaps of income over the past few years.

So how much is too much? That depends on how confident you are you'll be able to pay down the debt quickly. You do not want to gamble with your credit. My rule of thumb was always my ability to at least pay off the minimum balance ad infinitum at my current level of pay. I've never missed a payment, but I can't even begin to quantify how much I've payed in interest over the past few years.
posted by ztdavis at 4:00 PM on July 13, 2008

I have never carried a balance on a credit card, and I plan to keep it that way. So I'm mostly with the rest that say $0.

However, I do believe that credit can be used responsibly. I'd suggest thinking about things in terms of total cost and benefit. But you have to be very careful to find and account for every cost. First, calculate how much you will spend over time to pay it off. Look at best case (you get that job and have good income), worst case (you get nothing and stretch it out as long as possible with minimum payments on the card), and the most likely scenario in between. Consider also the psychological cost of being in debt to an uncaring, unwavering, unseen entity. Consider the impact on your month-to-month cashflow. Balance all of that (and anything else you can think of) against the benefit of whatever you might purchase.

It's difficult. This is the future we're talking about, so you have to make educated guesses, think about probabilities and likelihood of various scenarios, etc. Personally, I'm fairly risk-averse, so I generally consider the worst realistic scenario (i.e., not "I'm hit by a bus," but rather, "The job/project falls apart") and see if I could live with that. For example, I went into a graduate program with no funding, considering that worst case (realistically) I would go into debt to pay for a master's degree that would net me a high salary after graduation with which I could pay it off in a few years. It worked out much better than that, but I made sure I was okay with that scenario first.
posted by whatnotever at 4:08 PM on July 13, 2008

you indicated uncertainty over getting the job but know darn well the absolute certainty of that credit card bill arriving on your doorstep. that's a pretty clear indicator for what you should not be doing right now.

then again - this is job stuff. would the project be likely to increase your chances of getting that job? is this i.e. something you could add to your portfolio? such an argument might transform the outcome of your question. consider how much this would change the odds in your favor (and be realistic about it) and then consider it as an investment. I don't know enough details about your intended purchase, situation or income to be able to make a call on that.

credit card debt is the worst debt out there. period. exclamation mark. paragraph. 72pt type. you could get a better rate from your local loanshark. the only reason to make a major purchase on a credit card is points/cashback/miles and that only makes sense when you can pay it off right away. a business purchase might be something to talk to a bank about. or mom and dad.
posted by krautland at 4:13 PM on July 13, 2008

Also in the $0 camp, with the added concern that if you are US-based, the economy is not particularly rosy right now for freelancers. I'm working with a few firms who are laying off contractors in droves-- and they were aggressively recruiting freelancers as recently as March 2008.
posted by mozhet at 4:17 PM on July 13, 2008

You've got a risk-thing going. The project is very seductive, isn't it?

It may be that the risks, on paper, outweigh the benefits. It's your job to weigh and put a value on your creative urge and need.

It might be true that it's a pure, selfish incredibly strong desire. That can be a very good thing, and worth a lot on your balance. If that's the case, accept the penalty will be paid, and follow your heart. Of course, you'll smile and shrug and agree when someone "wiser" points the "selfish" out, because it wiil be true. Selfish doesn't always have a negative connotation. It might be defined in this case, as "taking care of self".
posted by reflecked at 4:39 PM on July 13, 2008

Is it necessary to practice your craft luxuriously? It was a particular word to use which made me wonder, if there were a way for you to purchase what's needed for your project without going so far as to buy the most expensive, top of the line. It's your call..

The other thing you must know about yourself is, when you plan and take on a big project, are you able to complete it and improve upon your craft in the process? Or are you considering going on a spree of buying expensive items in order to try and push yourself into doing the project? Again I don't presume to know, but your question seemed to indicate that you worried about rationalizing unnecessary things..

It seems only you will know, which of these items will truly help you with your craft and is valuable long term to you, which is a splurge and you could do with less, and how well you are at being disciplined in general, it seems that if you are, you could run the numbers and set a plan to pay off the debt and be fine.. I mean, it's not like we have debtor's prisons in this country.. but don't make a choice that is likely going to make you miserable in the future, like having to take horrible jobs to pay your bills and not having any time/energy for your art!
posted by citron at 4:50 PM on July 13, 2008

I'd look into getting a bank loan before going the credit card route. Many banks, especially credit unions offer smaller loans with decent rates.
posted by emd3737 at 5:02 PM on July 13, 2008

Credit cards are the crack cocaine of personal finance. Credit cards make you feel good while spacing you out in your own little world of insanity.

Have you thought about buying what you need for your project second-hand? Have you thought about barter?

It's f*cked up when someone said their VISA card is their patron. VISA isn't anyone's patron. VISA is another "p" word. Rhymes with "wimp".
posted by storybored at 5:21 PM on July 13, 2008

There's no point (no point) in having a credit card if you're not going to keep a balance on it. Why not just cut them all up?

Credit cards are no different from other lines of credit like mortgages or car loans. As long as you know what you're doing, as long as you can pay it off in a reasonable amount of time, it's win-win for both you and the creditor.

So, my answer: too much is governed entirely by your personal position and expectation of future finances. This isn't an answer people on AskMe can give.
posted by TypographicalError at 5:43 PM on July 13, 2008 [1 favorite]

Personally, I think it's too much debt if I cannot pay the balance off at the end of each month. If the credit card is used as a loan that you pay off each month in full, then there is some value in using one.

From a practical standpoint, I think if your debt exceeds your monthly take home income, it's too much.

Now, think about what you said: This is a personal project which will not earn you money back. That sounds to me like you want to spend money you don't have on something that is only for pleasure. In my books, this is no better than someone going out and buying expensive new shoes on credit. The fact that the project is related to your work is a moot point. If you cannot pay for it out of pocket, then don't go into debt for it.
posted by reenum at 5:48 PM on July 13, 2008

There's no point (no point) in having a credit card if you're not going to keep a balance on it. Why not just cut them all up?

I and the other 0-balancers would strongly dispute this. I got my first credit card when it was required for renting a car. That was a long time ago.

My wife and I put most of our purchases and many bills on a card. It puts the records all in one place (cash=no record, check=what you kiddin' me? Nobody wants a check anymore. The checkbook sits in a desk drawer.) and the monthly total is a budget check for our non-budgeting selves.

it's a win-win for both you and the creditor.

Lets see. The creditor gets a pile of your money. And you get to pay him. Sounds like a win-lose, a zero-sum game with you as the subtrahend.

But this is an old fart braying. Certainly, many businesses have been started with credit card debt when the usual hitting up family & friends reaches its all-too-limited limits.
posted by hexatron at 6:12 PM on July 13, 2008

My rule is to never pay interest on a credit card (or other small unsecured credit line).

I currently have $8000-ish in credit card debt, but it is interest-free until next May. I won't put more on that credit card than I can pay off in full then. If you don't have the discipline to do that, you should probably not carry a balance.

Cars and mortgages are separate, but I pay them off as quickly as I can. (Paid my last car off in a little over a year, for example, and have enjoyed the last four years of payment-free driving.)
posted by kindall at 6:24 PM on July 13, 2008

i would avoid the debt if you can. it does sound like you are trying to use your credit card to give yourself a break, but as someone carrying a few grand in debt from medical expenses not covered by my crappy insurance, it's driving me crazy. maybe it's because it wasn't optional to me, so it seems like more of a burden, but i don't know.

i would look into grants, part-time jobs, and cutting other frills and luxuries to reduce your dependence on your credit card. it's not irresponsible to use it, if you have a plan for paying it off, but there may be a cheaper way to do it.
posted by thinkingwoman at 7:01 PM on July 13, 2008

There's no point (no point) in having a credit card if you're not going to keep a balance on it.
That's utterly absurd.
  1. I get 2 or 3 percent cash back on all purchases made with my credit cards. That is, effectively, everything is permanently on sale for me.
  2. You can't pay with cash over the internet.
  3. It's inconvenient to pay with cash elsewhere.
  4. They are capable of mitigating the effects of certain emergencies.
Why not just cut them all up?
Because I'm not stupid.
posted by Flunkie at 7:16 PM on July 13, 2008

Another perspective on this is that you're basically trying to decide how to self-underwrite your own loan. Classic underwriting looks at "the C's" when deciding whether to make a loan: Cash flow, collateral, and character (or creditworthiness). Do the projections and the math and see where/when the money will come from to pay off the amount you plan to borrow (those projections will also help you see what the full loan amount will actually be, with interest calculated in); figure out what assets you have on tap in case your cash flow scenario doesn't go as expected; and assess your own track record in keeping up with debts. How much money would you loan you?

Credit card lenders don't really go through this process, which is one reason so many people get in trouble, but there's no reason you can't DIY it.
posted by yarrow at 7:45 PM on July 13, 2008

Jesus, I guess only the Fiscal Morality Squad is around tonight.

Listen: there's no fixed answer to this question, obviously. An absolutist stance on credit debt is PURELY a position of opinion; unless you are categorically opposed to debt it is an inconsistent opinion to boot.

Here are what are wrong with credit card debts:

1. The barrier to securing them is very low. As opposed to, say, a business loan, there is no requirement to demonstrate the sensibility of the money you are borrowing. If you secured a line of credit when you were flush your credit-worthiness is not "rechecked" when you actually go into the debt. Thus credit cards make it very easy to spend more than you can afford.

2. The cost and terms of the debt are frequently variable. This is a very bad aspect of the debt. Do you understand the variables which you agreed to when you secured your line(s) of credit? Have you kept (and kept up with) the changes of terms your creditors have periodically delivered to you? Do you understand what you have agreed your creditors can do to your terms if you miss a payment etc? Do you understand your rights if your creditor elects to seriously alter the terms of your debt? Are you willing to carefully read every piece of mail your creditor sends you about the status and terms of your debt? Most people who are competent at basic math and reasonably patient are capable of reading and understanding their credit card agreements.

Charging money to a credit card creates an ongoing expense, true. So does being alive. The specter of what would happen if you couldn't come up with money any more doesn't go away if you don't acquire any credit card debt. If you take on credit debt you will have to come up with more money every month. The same thing will happen if you move into a bigger apartment or nicer house or choosing to upgrade to a luxury car, but you won't get this rabid "NEVER EVER EVER" response to that sort of proposition.

What you do is run some scenarios, estimating what you would like to purchase and what it will cost. Know how interest accrues to your account and how your minimum payment is calculated. Run several scenarios of repayment and take a hard look at what this debt is going to cost you over time (this is tough math that you can find online tools for that I'm not going to link for you because if you're not willing to do the work you really shouldn't risk a debt that is basically a black box of unknown expense for your). If you are willing and able to do the math and the numbers you come up with are reasonable and the cost of the life of that debt is acceptable to you with respect to your personal project goal then assuming the debt is a reasonable choice.
posted by nanojath at 8:09 PM on July 13, 2008 [1 favorite]

I am an enthusiastic user of plastic. Until three years ago my wife and I had about $13,000 on a credit card and no problem making more than minimum payments. Until I lost my job. Since we had to tap into retirement savings to survive, we paid off the card and the car. Since then we've have had no balance on the card except for Christmas of last year, where we carried about $2,000 for three months.

One card is used mostly for online shopping, very small amounts usually. The other is a Costco AmEx. Whenever we make a purchase on it, the amount of the purchase is transferred from checking to savings, then transferred back to pay the monthly balance.

We also have debit cards, but we use it only for offline purchases or places that don't like American Express. It doesn't provide the safety of the credit cards.

One avenue we've used for major purchases is BillMeLater. For online retailers that offer it, the 3 or 6 months same as cash offers have worked out very nicely for us. They don't require a monthly minimum, and are very clear on when you have to pay off the debt before you have to pay the accrued interest.
posted by lhauser at 4:14 PM on July 14, 2008

Don't do it. Find a way to pay for it that doesn't involve debt.
posted by onesix18 at 6:15 AM on July 15, 2008

I'm a believer in 0 debt and actually think you CAN live w/o CCs just fine, though some things are harder or require having more of a fiscal cushion (ie, car rental). But that's neither here nor there with regards to this question - here the question is "should I charge things that I cannot pay off immediately?"

There's plenty of answer up above, I'd offer just this one suggestion: remember that when you're doing this, you're not paying $1 when you charge $1. You're paying a premium over time rather than the actual selling price of what you're buying.

My quick run in excel says that if you charge $1000 at 10% interest and pay 1/36th every month (aprox the 3% min most cards require) you'll be done in 42 months and will have paid $1354.25 for that $1000 purchase. Pay 1/24th every month and it'll only cost you $1120.07.

So the question is, do you want to spend $1300 for that $1000 item?

All that assumes you never miss a payment ($20-30 late fee) etc etc.
posted by phearlez at 11:11 AM on July 15, 2008

I funded my business with credit card debt aswell as it was the only way to pay for assets which were being sold to clients.

Here are my tips:
1. I agree with XO you can make the purchases in the first month and repay it with a 0% balance transfer credit card. Do a basic calculation with this and just double check you can repay your loan with the worst and best case after your show.

2. Remember the debt is there, sometimes we would forget about the debt and trade is if it wasnt there. Suggest to highlight it in your management monthly review meetings just to keep yourself on track.

3. Negotiate - We would always try and negotiate terms of trade to delay the payments before using a credit card. Usually if you pay your first bill quickly you can usually get a bit more time on the future purchases.

4. When you have paid off your loan, open a high interest savings account and stockpile the cash into a different account. This will make you come up with more creative ways of purchasing things within the business as the money won't be directly accessible in your main account.
posted by moehorn at 6:32 AM on October 19, 2008

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