In a Pew Charitable Trust report, roughly 80% of Americans are in debt from mortgages, student loans, car loans, and credit cards. As a matter of fact, credit card debt is second only to mortgage. As many as 40% of us have credit card debt, and 65% carry a balance every month (revolving debt).25 The average credit card’s interest rate is 15%, according to CreditCards.com. Consider this example: If we had a credit card with an Annual Percentage Rate (APR) of 18%, and a $5,000 outstanding balance, the minimum payment requirement is around 2.5%, or $125. You think that this means $125 x 40 payments = $5,000, which means in about 4 years the debt will be paid off.
This is the real shocker: keeping on the minimum payment schedule, that $ 5,000 actually would take 273 payments…over 22 years!
Credit card companies keep the minimum payment schedules low, so that they can collect on that interest for as long as possible. And as the balance is coming down, the minimum payment becomes even less. It’s one of the major ways that lenders make money. Also, by hoping that many of us will only make the minimum payment, it helps people rationalize the debt: “This $5,000 charge is only going to cost $125 per month, so we can afford that!” Ironically, that $125 payment only reduced the balance by $50, because the other $75 went to paying interest fees. This means that over the long term, 60 cents of every dollar goes towards interest! We would pay more in interest than what we had originally charged. Consider that the same $5,000 credit card balance, making only the 1.5% minimum payment every month at 14% interest, would take almost 61 years to pay off because the interest would add almost $16,000 more to the debt over that time.
Regardless of the interest rate, we would save a significant amount of money by paying off our debt. Americans should be sprinting to the finish line to get out of debt We’re trying, we’re pushing, and we’re paying–but it seems like we’re going nowhere. What’s even more frustrating is that we are doing the right thing by paying down our balances on time, but we aren’t seeing any meaningful results. The potential problems can only intensify, because many of the credit card companies award us with increased credit limits rather than keeping us at a limit we can afford to pay off. By increasing our credit limit from $5,000 to $6000 or maybe $6,500 they hope we will charge more. It’s a psychological boost because we think, “they feel so good about me, that they gave me more credit.”
Unfortunately, according to Time.com, many people will spend this credit increase immediately, adding 10% to our existing credit card debt on average. It’s important to remember that whether it’s a credit limit increase, a pre-approved card in the mail, or some incentive to charge more, we control our credit decisions. We can ask that our credit limit isn’t increased, rip up those cards and applications that come in the mail, and don’t need to take advantage of any special offer. “NO” can be a great way to stay out of trouble.
Credit cards can be a great convenience, and provide some great perks, but they should be properly managed. It’s important to remember that card providers are actively looking for customers, because we are a revenue source. However, you should know some of these key points when using credit cards.
1. Know your credit score. The better your credit score, the better card deals you can get. 2. Using the web to help search for credit cards that fit your needs can be very useful, such as creditkarma.com or creditcards.com. However, applying for a lot of cards can also hurt your credit score. 3. Beware of annual fees, hidden charges, or additional costs for being late or missing a payment, and cards that offer rewards–the later can be more expensive. 4. If you have trouble making payments on time, steer clear of card offers that give you a low introductory rate, but skyrocket if you make a late payment. 5. Don’t max out your accounts, as using too much credit can be a negative. 6. Cancelling cards that you no longer use can actually hurt your credit score if closed too soon. 7. Avoiding credit altogether doesn’t allow card companies to view your credit history. 8. Don’t lie on applications, Not only is it illegal, but also qualifying for a larger credit limit than you can handle could cause additional problems. 9. Co-signing credit cards or loans for someone else can hurt you. In 2016 CreditCards.com reported that 4 in 10 co-signers ended up losing money, or it hurt their credit.
DEBT MANAGEMENT
