How many credit cards do you have in your wallet? What are they costing you? The average American has five or six. That includes bank cards like Visa or MasterCard, department-store cards, gasoline cards and general-purpose cards such as American Express. If each credit card has a $2,000 line of credit, that means we have $10,000 – $12,000 in credit available to us, on average.
Consumer debt in the United States 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. Even though interest rates are at a 40-year low, credit card interest is still comparatively high. Those low interest introductory offers you hear about are usually only for six months or a year. Then the interest rate increases to the market rate.
Unfortunately, we have gotten used to whipping that piece of plastic out of our pockets for any little purchase we want to make 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 we have maxed out our credit card limits by making lots of little, nonessential purchases, we may not have the credit capacity to take care of those emergencies or big, but necessary, expenses.
On top of that, most of us have two other credit card problems. First, we 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.
How much is all this credit costing you? For the sake of simplicity, let’s just look at one card. Let’s say you have a balance of $3,000 on one of your bank credit cards and the interest rate is 19%. You have to make a minimum payment of 2.5% of the balance every month. A pretty typical scenario. If you do not 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. What if you just pay the minimum month by month as it goes 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. Making just that minimum payment each month will have cost you $4,729.44 in interest.
Multiply that by four or five more credit cards and most of us would have a credit problem.
If you decide you can set aside $100 every month to pay off that $3,000 debt, you will 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 $3,000 in interest expense.
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.