Minimum Payment, Maximum Regret? How Credit Card Interest Really Works
Credit card debt is like a one-night stand with a married woman, fun at first then wrecks your life by morning. The average U.S. consumer holds a $6,580 credit card balance, the average household $10,767. Yikes. With an average interest rate of 22.25%, these households are paying $199.66 per month in interest! Money that is literally flushed down the toilet.
Let's take the numbers above and extrapolate a few examples on how interest rates work with credit cards and why it should keep you up at night.
If your current balance is $10,767 with an interest rate of 22.25% it will take you 3 years and 2 months to pay off paying $400 per month. You will have paid $4,286 to the interest rate devil.
Using the above example, if you only pay $200 per month (34 cents per month paid towards principal), this will take you 28 years and 8 months to pay off, while contributing $57,977 to the interest rate devils bank account. Lesson here is DO NOT just pay the minimum balance.
Using the above example, if you pay $1,000 per month, this will take you 1 year and 1 month to pay off, while contributing $1,355 to the devil. Better but still not ideal.
Using the above example, let's say you had a brain fart, and charged the $10,767 on your credit card, chalk it up as early Alsheimer's. If you pay $10,767 on your next bill, you will have paid exactly $0 in interest (this is ideal)
If you're interested in how this situation snowballs into an unreal mess, keep reading. If your balance is $10,767 (at 22.25% interest) and you are feeling generous and pay the minimum payment of $200/month (the approximate interest) but you continue to swipe the card on small things like going to the movies, dinners out, birthday gifts etc. and manage to accrue an additional $500 per month on the card. (net difference is $500 purchases + $200 interest minus $200 payment per month on your balance, no big deal, right???) Of course, life is busy, and you tell yourself you will pay the minimum payment until life improves. 3 years later your balance is $36,110, yep, nauseating.
Credit card debt is a vicious cycle leading to depression, anxiety, low self-esteem and overall crappy quality of life.
Thought provoking, mind bending, never before seen recommendations to avoid credit card debt:
Pay cash
Pay with debit
Don't buy it
Quite simple. The hard part is having the will power to stick to the 3-step plan above. I recommend jumping on team "no credit card debt" as soon as possible.