In a society where credit cards are mailed to nearly every person on their 18th birthday, Americans often overlook the burden of debt. The use of this high interest rate loan is something that is expected in today’s culture, just like paying for gas in your vehicle. Especially for families that are just starting out, credit card debt can seem like something they’ll be able to pay for in the future. I’m here to remind you this isn’t necessarily true.
Credit card debt is one of the leading causes of bankruptcy in the United States. This should be no surprise. It allows people to spend money they don’t have and have not earned, hoping that one day in the future they will be able to pay it back. While this may be an optimistic outlook, a lot of different factors play into your ability to pay your bills, some of which you will not control such as health and loss of job. Have you ever calculated how much those $100 jeans you charged on your Visa will cost you 5 years from now? It might be scary.
One of the reasons credit card companies are so successful is through deception. A total debt of $10,000 is not uncommon in America these days, and neither is a $150/month payment accompanying it. Wow, how generous MasterCard must be! “I have $10,000 in debt, but only have to pay $150 this month? This is great!” Here’s what most people don’t realize: paying the minimum payment ensures you pay the most interest.
Pretend you have $10,000 dollars in a saving account along with $10,000 dollars in credit card debt. When should you use your savings account to pay off your debt? The answer: almost always. A savings account is already earned money and gains a positive interest for you. With that said, it is usually only 2-3% whereas the common APR for credit cards is currently 15%. Therefore in 5 years, your savings account amount will be just over $11,000 (assuming you don’t add more money) and your credit card debt will be just over $20,000. Look how quickly debt interest increases!
Put simply, a $10,000 loan from MasterCard will cost you $25,000-$30,000 and take 20 years to pay off if the minimum monthly payment is paid on-time each month. This all sounds quite obvious when put like this, but you’d be surprised at the number of people who have more money in their savings account than their debt amounts, but still have substantial credit card debt.
The exception: The only time you should not spend your savings on your credit card debt is when you can use your savings account money on an investment in which the return interest is greater than the interest on your debt, therefore you would be making more money than you’re spending simply through interest. In using our example earlier, the interest on your investment must be greater than 15%. As good as that sounds, ten years ago this might have been possible, but in America today this is not very realistic.
My post is a warning to those struggling with finding the desire or ability to pay off credit card debt. Make sure you are informed about your card’s APR, late-payment penalties, and fees for cancellation. The more you realize what things will actually cost when you swipe that glittery card, the wiser you will be using your card next time.