You may not realize it when you are using your credit card, but with interest payments, your credit card purchases can end up costing you a bundle, and more importantly your time.
Let’s think about this way:
If your balance is $15,000, and your interest rate is 20 percent, your minimum monthly payment will be 2.5 percent of your balance. Your minimum payment will be about $375 for the first month. If you make only the minimum monthly payments, it would take you almost 42 years to pay off that $15,000 debt. The total cost of your payments would be a whopping $44,500—including $29,500 in interest alone!
Using the same example, say that part of the $15,000 balance is a $450 leather jacket. Making only minimum payments you would end up paying $815 for the leather jacket and it would take almost 7 years to pay off! You probably will have replaced the jacket before you have finished paying for it. So, what can you do to reduce this amount?
Let’s consider the following:
If you tighten your belt so that you can pay $500 a month on that debt, you will be debt-free in three-and-a-half years and you will have paid only $6,000 in interest. Your total cost will be $21,000, which is less than half of what you would have paid if you made only the minimum payment. Today’s credit card interest rates are slightly lower than 20 percent, but the importance of paying much more than the minimum required remains the same. Credit card use has real consequences. These consequences start to add up when times are hard.
Let me tell you about a time when I got myself in over my head in credit card debt. Right out of college I found myself this multimedia job. It was just perfect. I loved working there and was making really good money. I had been employed there for about two years, when one day, out of the blue, the entire department got laid off. I just couldn’t believe it. My first thought was, “How could this have happened to me?” Once I got over the surprise and disappointment I quickly began my job search. I was very confident that I would find another job soon. After all, I am an excellent developer.
After a couple of weeks of being unemployed, I had to start using my credit card to pay for expenses. I am not going to lie to you: I wasn’t just using my credit cards for needs, but for wants, too. For each new outfit I purchased, I said to myself, “This will be perfect for when I start my new job.” I was still very confident that a new job was just around the corner. Well, six months down the road reality finally set in. I was still unemployed, and my credit card balances had skyrocketed. I wasn’t sure what I was going to do. I was so overwhelmed and just horrified by the thought that I might have to declare bankruptcy.
The very first thing I did was stop using my credit cards. I put them away, and to be quite honest, at that point, I didn’t want to see them ever again. I then called all of my creditors and explained my situation to them. In talking with them, we were able to come up with a flexible payment plan that would work for me. Once I knew what my payments and payment schedule would be, I created a strict budget.
Let me tell you, it wasn’t easy to follow. It was hard walking by a RadioShack or the Apple Store and not being able to go in, but I knew I had to stick to my budget to make it work and to get myself out of this mess. Within the next couple of months I finally found a job and in time I was able to pay down my credit card debt. It was a tough road but definitely a valuable lesson. I hope you can learn from my mistake and avoid getting into a situation like this of your own.