How long will it take to pay off my credit card(s)?
While credit stimulates the economy, it does have to be used judiciously. Credit is not money. Derived from the Latin word for "trustworthiness," credit is based on faith that the borrower will repay the debt with real money. One should not use credit in place of money when there is little or no likelihood that payment in real money will be made—using credit without the intent or ability to pay is theft.
Today, credit has become a business in its own right. Credit is issued by banks, savings and loans, credit unions, public utilities, and even merchants. According to the Federal Reserve, there was more than $2.5 trillion of consumer debt outstanding by late 2009—this is more than double the amount outstanding in 1994. This represents hundreds of billions of dollars in interest earnings to lenders. This is why credit card companies aggressively compete to get you to use their credit cards and services. The marketing is so aggressive that consumers may lose sight of the fact that this is not free money and make excessive purchases to the point where they find themselves in financial difficulty.
How Much Debt Can You Handle?
If you feel that you have too much debt, you are not alone. Most people have substantial debt; many have more than they can handle. However, debt is not all bad. Sometimes it makes sense to use borrowed money for investments. However, most folks are not using debt in that way; they are using it to make ordinary purchases of things they would probably be better off
without, anyway. In our competitive society, spending has become a status symbol. This encourages people to spend more than they should -- more than they have. Consequently, they run up tremendous debt.
While some debt is okay, too much debt is not. So, how do you know whether you have too much debt or not? First let's look at the different kinds of debt we might incur.
Responsible Use Of Credit
While credit is very important to the economy, its abuse is harmful. Credit is extended with the faith that borrowers will repay the debt. Goods and services are provided on credit with the expectation that they will be paid for with money in the future. Credit makes commerce more convenient. When credit is abused, everyone loses. Credit abuse increases the cost of credit to everyone.
One should never use credit to purchase things for which one will not be able to pay in the future. Many impulse purchases are made on credit with little thought given to how the debt will be repaid in the future. If one calculated the true cost of goods bought on credit, one would have second thoughts about making the purchase in the first place. Here is an example: a new television flat-screen HDTV model retails for $5,000. If purchased on a credit card with a 12% annual percentage rate (APR) compounded daily, and with minimum monthly payments of $166 paid over three years, it winds up costing over $5,980. Is it worth almost $1,000 more to have it now (furthermore, the retail price in 3 years will probably drop)? That is like going into a store that advertised "SALE--ADD 20% TO EVERY PURCHASE."