Consumer debt in the U.S. is at an all-time high. Household spending is rising faster than household income. That means people are borrowing more and more money to finance their spending habits, a lot of it by using credit cards. That includes bankcards like Visa or MasterCard, department store cards, gasoline cards and general-purpose cards such as American Express.
What are the Major Credit Card Problems?
Unfortunately, Americans have gotten used to whipping that piece of plastic out of our pockets for any little purchase without much thought to the consequences. Good money managers try to use credit cards just to pay for emergencies or large expenses, like a big auto repair bill, for which they do not have enough savings. If credit card limits by making lots of little, non-essential purchases, the result may be lack of credit capacity to take care of those emergencies or big, but necessary, expenses.
On top of that, there are two other credit card problems. First, most people only have enough disposable income to make the minimum payments. Second, credit card interest rates do not necessarily change much when market interest rates change. Many cards now, on average, have interest rates of 19-23%. Credit card interest rates will go much higher if you have a late payment or if you have gone over your limit. In addition, the credit card company will assess over-the-limit fees.
What is Credit Costing You?
How much is all this credit costing you? For the sake of simplicity, look at the costs of one card. If you have a balance of $3000 on one of your bank credit cards and the interest rate is 19%, then you have to make a minimum payment of 2.5% of the balance every month. A pretty typical scenario. If you don’t make another charge on your card, that payment is $75 per month. Of course, that minimum payment will drop every month as you pay down your debt, as long as you never make another charge on that card. However, if you just pay the minimum month by month, your balance will go down from $75 to $69 in 10 months and to $62 in 20 months, and so on. If you just make that minimum payment month after month, it will take you a shocking 283 months to pay off that one debt — more than 23 years. For one card with a $3000 balance! And making just that minimum payment each month will have cost you $4,729.44 in interest!
Multiply that by 4 or 5 more credit cards and most of us would have a credit problem.
Instead, let’s say that, after reading this column, you decide you can set aside $100 every month to pay off that $3000 debt. In this case, you’ll have your credit card paid off in 42 months and the interest expense to you will be $1,101.73. That is shaving more than 20 years off your debt repayment and over $3000 in interest expense.
Pay Off your Debt
Take a look at your credit card balances, interest rates and minimum payments. Pick one, preferably the one with the highest interest rate, and start paying off that debt with as much as you can reasonably afford per month. Then, move on to the next one. In the meantime, try to use your credit cards only for necessities and emergencies. You will pat yourself on the back someday for your good money management.