You only live once, so you might as well enjoy yourself, right? If you work hard and want nice things, why deny yourself? In this age of credit, it seems like you can have it all – live large and be in charge. But that’s just the thing…you’re not really in charge, not when you’re carrying a significant amount of credit card debt.
But what’s so bad about having debt you ask? Well for one, you’re not exactly in control of your finances. If you let the problem get out of control, it can really come back to bite you. Although fulfilling wants is immediately gratifying, it isn’t worth the headache and hassle of impending financial troubles.
Not convinced? Even if you’re not thinking that far into the future, take a look at the true cost you’ll pay, if you leave a remaining balance on your credit card. It might make you think twice before going swipe happy on things you don’t need.
Purchase Price vs. Real Cost
Picture this. You’re out shopping when you see it…right there in front of you is the gorgeous, covet-worthy Prada bag you’ve been eyeing, and now you desperately want it. The only problem is that it’s way out of your budget (We’ll assume that you have one.). You’re probably thinking to yourself, “how much could it hurt to purchase this one item on credit?” Besides, you never buy nice things for yourself.
Well, let’s do the math. The designer purse costs $2,500, and we’ll estimate your minimum credit card payment as 2% or $50. If your credit card has an annual percentage rate (APR) of 18%, your $50 payment would cover $37.50 in interest and $12.50 on your $2500 liability. After you make your first payment, you still owe $2,487.50.
Let’s break it down:
- Divide the APR (18) by 360 days (12 months x 30 calendar days). That equals .05 (5%).
- Multiply 5% by 30 calendar days. That equals 1.5%.
- Finally, multiply 1.5% by the original balance ($2,500). That equals $37.50 in interest.
If you pay only 2% of your total balance due every month, until the purse is completely paid off, the real cost comes out to a whopping $8,397, with $5,897 in interest alone! Not only will the bag cost you over 3 times more than the original purchase price, it will also take you 3 decades to pay off!
Think about it. If the purse costs $8,397 upfront, would you still buy it? Of course not! However, when you charge it to your credit card and make minimum payments, you’ve inadvertently agreed to the outrageous amount. I’ll bet that Prada bag won’t seem quite as appealing anymore.
Tackle Credit Card Debt
If you’ve already racked up some credit card debt, here are some things you can do to prevent the situation from getting worse.
- Figure out how much you owe. The first step is to get organized. Create a list of your debts, payment due dates, and the statuses of the accounts.
- Create a budget you can stick to. Write down your current income and expenses, and come up with a manageable debt repayment plan.
- Prioritize which bills to pay off first. If you have multiple credit cards, start with the highest interest rate card. Increase your payments on that card, and continue making payments on the other cards. One by one, you’ll knock out your credit card debt.
- Pay more than the minimum amount. As a good rule of thumb, always try to pay your balance on time and in full each month!
- Exercise self-control. Getting out of debt isn’t easy, but with some discipline, you can soon reduce your debt and be on your way to financial freedom.
- Get professional help. If you’ve done everything you can to manage debt on your own but aren’t making any progress, consider working with a debt relief specialist. Rather than falling into a cycle of debt, a professional can help you get back on track financially.
It’s important to remember that, unlike other aspects of life, you can take control of your financial situation. Even if you are deep in credit card debt, you have the ability to turn things around.
It’s not about denying all of your wants or being ultra-frugal; it’s about making wise money decisions. A $2,000 balance might not seem like that much debt in the grand scheme of things, but with high interest rates, it can make the amount nearly insurmountable.
The next time you wish to make a purchase with your credit card, ask yourself if you have the means to pay it off in full and on time. If the answer is no, figure out what the “real cost” of the item is and determine if it is still worth buying. Sometimes, delaying short-term gratification for long-term financial stability is one of the best decisions we can make for our financial future.