Now we move into the wild world of debt. And believe me, it is a wild world. More than 191 million people in the United States have credit cards, and 120 million of those (almost half of all adults) have credit card debt, making credit cards the most common form of debt. BIPOC have disproportionately more credit card debt, and that debt comes with higher interest rates.

I have a love/hate relationship with credit cards. Some use them as a tool to pay for vacations with points. For others, having the ability to use a credit card to bridge the gap when cash isn't available is a lifeline (albeit an expensive one) because there aren't better options available – and nearly one in four people in the United States can't get approved for a credit card.

When we do get a credit card, it doesn't come with a manual or even any directions. And considering they can change the financial trajectory of our lives for the worse (or much worse), that's a big problem. Understanding how credit cards work can help us make informed decisions. You know … knowledge is power and all that.

What Are Credit Cards?

A credit card is a revolving loan from a bank or other institution. You can use the card to pay for things, pay the balance down, and build up the balance again. It's up to you. And that's why it's called a revolving loan. The loan comes with a plastic card (or other material) that allows you to make purchases. You are given a certain credit limit, which is the maximum you are able to borrow (or put on the card) at any given point in time.

How Credit Cards Work

Each month you'll have a required payment on your credit card (a.k.a. a minimum payment). This is different from your credit card balance or the total amount you owe at any given point in time. That bears repeating. Your minimum payment is not the total amount you owe. It's much less.

Each credit card company calculates its minimum payment differently, but it's often 1–3% of your balance. That's why it's not uncommon for your balance to increase over time when you make minimum payments, even if you're not spending on the card. Woof. I know.

Then there's the interest rate (also called APR or annual percentage rate), which is the amount we pay to compensate the credit card company for lending us the money. The average credit card interest rate is 14.5%, but for some reason most credit cards I see have interest rates upwards of 20–25%.

The APR is applied to the balance that is not paid off at the end of the month (or cycle). For example, if your balance is $1,000 and you make a $30 minimum payment, you'll pay interest on the remaining $970. For an APR of 20%, that's a 20% interest rate per year, but you are charged interest monthly (20% divided by 12) as part of your monthly bill, which comes to about $16 in interest. If you continue to make payments of $30 per month, it would take you 50 months (over four years) to pay down the credit card and you will have paid $471 in interest or 47.1% more than the original $1,000 balance. To find the exact amount, there is typically a line item on your credit card statement titled “interest charges” or something similar.

If you like to get things on sale (who doesn't?), keeping a balance on your credit card is the opposite. You're paying more for something than it costs. And just like compound interest works wonders for our investments, it works against us with our credit card debt. Most credit card companies compound interest daily, meaning the balance used to calculate your interest goes up each day – interest on interest.

It's Time to Let Go of the Shame

Before we move on, we need to address the shame many of us feel about our debt. Sometimes we feel so much shame, we can't even look at our debt or it can even make us physically ill. But what is debt, really? Debt is just money you owe for something you bought. I'll say it again. Debt is just money you owe for something you bought.

That's all it is. It doesn't mean anything is wrong with you. It's not bad. You're not bad.

It's also important to remember how much we have working against us in the first place. If you need a refresher, head back to Chapter 1. Credit cards add to it because they make it feel like we have more money available than we do. And if we are spending more than we'd like, we don't have to deal with it until next month because we're always paying for last month's expenses. That delay can get our spending all out of whack.

We've Got Some Power

If you get charged a late fee, don't be afraid to call your credit card company and ask for it to be removed. If you notice your interest rate is high, you can try reducing that rate as well. Always mention how long you've been a customer and/or how long it's been since your last late payment (if it's been a while). They usually will let you off the hook for the first late payment or two (which can be a $35 fee!). It's easier to negotiate your interest rate down before you are carrying a balance.

Take Inventory of Your Credit Cards

The first step to paying down or managing debt is to take inventory. I've done this with hundreds of people and I promise, while it can feel scary to see everything in one place, it's most often a huge weight off their shoulders. Until we know what's going on, we can't do anything about it.

Start with your credit cards. You can take inventory right here or you can download the Excel debt tracker from the Financial Adulting toolkit. You'll want to gather the name of the credit card (so you know which one it is), the balance (how much you owe right now), the interest rate (or APR), the minimum required payment, the payment date (this can help us see if we have a lot of things due at the same time), and the credit card limit.

Do this for each credit card you have. If this feels overwhelming, start with one card. Breaking steps that feel too big into smaller manageable steps sets us up for success.

Make Your Credit Cards Work for You

With this information, you can make a plan to use credit cards (or not) in the way that makes sense for you. Test out the strategies that seem like a good fit and don't be afraid to pass on the ones that don't.

• Pay off your credit card balance each week. This makes your bank account a better reflection of the cash you have available.
• Don't carry a balance, if possible, to save in interest.
• Use sinking funds to smooth out larger irregular expenses (detailed directions in Chapter 5).
• If you travel for work, have a separate credit card for work travel expenses. This is especially important if it takes time to get reimbursed or you get confused about what's work-related. Also, when our credit card balances are relatively high (travel can do that!) our everyday expenses feel small or like less of a big deal, which can cause us to spend more.
• Make sure any credit card fees you pay are worth the perks. You can calculate the value of your credit card perks based on your spending and lifestyle. We have a special calculator to help you do that in the Financial Adulting toolkit.

On to Student Loans

Before we can make our debt paydown plan, we have to lay out all of our debt, and for many of us, that includes student loans. 70% of people are graduating with some student loans and with college tuition where it is, it's no wonder!

If you think your student loans are complicated, you're right. If you think the systems where you manage your student loans are opaque, you're also right. The good news is, if you already have your student loans, you don't need to know everything about every type; you just want to understand the details of your loans and what that means for your options.

Some of the Problems with Student Loans

I sat down with Chris Abkarians, co-founder of Juno and Suraiya Ali, head of content at Juno, which is a company that bulk-negotiates student loan refinancing for its members to get really low rates. You know I love that. Chris and Suraiya helped break down the student loan landscape.

Federal Student Loans

Federal loans make up 90% of all student loans. Take it away, Chris.

Do You Remember the College Scorecard? The Drama Continues …

From Chris:

Private Student Loans

Private loans make up 10% of all student loans and 89% are undergrad loans. Many undergrads use private loans to fill the gap between federal loan limits and the cost of tuition.

Chris says, “If you were to google ‘best student loans’ right now, you'd find many websites with very similar top 10 lists. A lot of people would reasonably assume that if the same place is in the top 10 over and over, that it is probably pretty good, but banks don't get listed on the top for offering the best rates, they get listed on the top by paying more to be put there.”

On the lists of banks, you'll see very wide interest rate ranges from each lender, which impacts your perception of what's a good deal. Suraiya shares, “If the rate range is 3%–12% and you end up with an 8% offer, that seems really good because you know it could have been as high as 12%. But in reality, with your credit score you should be offered 6% and that difference would save you thousands and thousands of dollars.”

Then if you try to ask a financial aid officer to help guide you in the right direction, in most cases, they won't, because there's a regulation that prevents them from making recommendations.

“Fun” fact: Why can't financial aid offices make student loan recommendations? A scandal. Financial aid offices were accepting dinners and other things from private lenders in exchange for recommending them to their students. The regulatory reaction (Chris calls it an overreaction) was to make it so financial aid offices could no longer make recommendations. Chris says it would be great for financial aid offices to work together to get the best deal for their students, but with the regulation they can't do that.

What's the lesson in all this? If you are looking to take out student loans, do your research, expect information to be misleading, and map out what your student loan payments will look like when you graduate (or before) to see if they are workable.

Student Loans Disproportionately Affect the Black Community and Women

Suraiya observes, “If a Black individual gets an MBA at the same school as a white individual, and if they're already going to be entering a job market where they're going to be paid less for the same job because they happen to be Black or a person of color, even if they took out the same amount of loans, the amount of time it takes the Black individual to pay those loans off is exponentially higher versus the white individual. And that's only accounting for one type of discrimination – in wages.”

With the wealth gap, BIPOC families are sending their kids to college with less family wealth. If your child isn't going to one of the colleges with a huge endowment to provide financial aid, you have to borrow more. Your child hits a cap on the undergrad loans so you either take out a parent PLUS loan or a private loan. For a private loan, your co-signer's credit score impacts your rate or ability to take out the loan in general and credit scores are racially biased (read up about it in the Financial Adulting toolkit). In many cases, parents take out a parent PLUS loan that they aren't able to pay and the burden is on the student to help them pay that off.

Add Any Other Debt to Your Tracker

If you have other debt outside of credit cards and student loans, like a mortgage, car loan, or personal loan, you'll want to add those to your debt tracker, too.

Make a Plan to Pay Down Your Debt

Whew! You should be really proud. You've taken inventory of your debt, and it's all organized. Now you are ready to make your debt paydown plan. Here's how to do it.

What If I Can't Make My Payments?

If you can't make your debt payments, a great place to start is by creating a health and safety budget (Tiffany Aliche taught us how in Chapter 5) and then once you have an idea of what you can put toward your debt, call up your lender(s). They may offer programs where you can pause payments or decrease the payment amount. If you are unable to make payments on your federal student loans, you may qualify for deferment or forbearance (they are pretty similar). If you qualify for deferment, you can stop making payments on principal (and interest, if your loan is subsidized). If you don't qualify for deferment, forbearance allows you to stop making payments on principal or reduce your monthly payment for up to 12 months. In most cases your loan interest will still accrue and these months won't count toward forgiveness.

During the pandemic in 2020 and 2021, most federal student loans qualified for a student loan payment pause. The interest rate on loans was changed to 0% (for the time) and there were no required payments. Each month still counted toward forgiveness and any payments made went to pay off past interest and then went directly toward principal.

If you are unable to come up with a solution and are not able to make your payments for some time, the late payments will show up on your credit reports and the lender might sell your debt (for a steep discount) to a collections agency. There are very specific ways to handle working with collections. Do some research and even come to the call with a script when you're ready to speak with them.

If your debt situation is extremely unmanageable, there's also bankruptcy, which I mentioned briefly in Chapter 10. This is a huge decision with many repercussions, so it's important to do your research and talk to an attorney before moving forward.

Should I Refinance My Debt?

Refinancing means taking out a new loan (usually at a lower interest rate) to replace some or all of your current debt. The lower interest rate means you'll pay less interest over the course of the loan and it can also lower your monthly payment. You can refinance credit card debt, student loans, and other debt as well. Here's what you need to account for.

Let's Talk About Buying a Car

For those in the market for a car, I'm sorry. For most people, buying or leasing a car is not a fun process. I think the only person I know who truly enjoys it is Justin (my partner) because he loves to negotiate. He spends days negotiating. Here's how to decide whether buying or leasing is best for you:

1. Know your budget (including all the extra things that go into maintaining a car). Don't forget insurance, maintenance costs (scheduled and surprise), gas, and parking (especially if you live in a city).
2. Run the numbers. List out what each option (lease vs. buy) would cost you over the next 10 or 20 years (including all the extra things, how long you plan to own the car, and the resale value). I've included an example in the Financial Adulting toolkit. Look at these side by side.

   Most financial advice will recommend that you purchase a (used) car. When you run the numbers, buying typically makes the most sense if you keep the car after you pay off the car loan. That's the real kicker. Most people don't do this or don't want to do this. But once you pay off your car loan (which can take 5–10 years) and have a car that's payment-free, that's really when buying rather than leasing saves you a lot of money. Be realistic about your plans. Sometimes seeing how much money it would save is enough to get you on board!

3. Do your research and negotiate. It's important to know your stuff going into a negotiation. Know what you want and know what's a good price (resources are in the toolkit). Definitely call up multiple places and negotiate. Give each place a chance to beat the other's lowest price. If they do beat it, go back to the other and continue going back and forth. I know this takes work but it's a big purchase you don't make very often. Some places are looking to meet quotas (especially volume dealers) and will even take a loss on a car in order to meet the quota.

Financial Adulting Checklist

• Let go of the shame around your debt.
• Understand how credit cards work and create strategies to make them work for you.
• Calculate how much you are paying in interest each month.
• Negotiate away late fees, if you have them.
• Understand the student loan landscape and how they disproportionately impact BIPOC and women.
• Before you take out student loans, negotiate the bill (a.k.a. tuition) and shop around.
• Take inventory of your credit cards, student loans, and other debt.
• Make a plan to pay down your debt and update your financial plan to reflect it.

Okay, that's all I've got for debt. You've made it to the final chapter. This is where it all comes together and the magic happens. And I'm excited to introduce you to your new money coach!