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Credit card companies have a way of making you feel oh-so-special, don't they? You have been pre-selected. You qualify for this special offer. It's like being that kid in grade school who always got picked first for the team. How can you refuse? How can you turn them down when they just want to give you something?
Well, stop being flattered. What they're giving you is an opportunity to destroy your finances, and it comes in the form of a terrifying little thing called revolving debt.
If the term is unfamiliar, revolving debt is a loan -- only you don't have to reapply for it every time you want something. You want that 60-inch plasma television? Whip out your plastic and buy one. Pay a little off this month, a little off next month. But then maybe you get a flat and need to buy new tires. Then maybe it's your mom's birthday and you want to buy her something a little special.
The next thing you know, your credit card (which came free of annual fees and with a special low, low interest rate) is running a $200 monthly minimum with a rather frightening balance that doesn't seem to be going anywhere but up.
Only Fools Fall for Minimum Payment Plans
At first, it might seem really cool that your $1,500 television only costs you $45 a month. But let's calculate what that TV is really costing you.
We'll assume your interest rate is 12% (a little below average), that you add nothing else to the card and that you simply keeping paying your $45 per month. Guess how long it'll take you to pay
for that television: 8 years. And how much will you have paid when all is said and done: Approximately $2,111.
Betcha Can't Apply for Just 1
If you're like most folks who carry balances on their cards, you've got more than one -- probably a whole stack. This is common; when credit card companies know you've been giving a little love to one credit line (and they always know), they all want a piece of you.
Once you've joined the club, you get offer after offer after offer.
Here's the thing: Let's say you have $9,000 of revolving debt (the U.S. average) that you're slowly chipping away at, minimum payment after minimum payment. You are likely going to spend 9 to 15 years eliminating that debt (assuming you avoid adding anything more to it along the way). And you're going to pay way more than $9,000 getting rid of it!
Still feel special?
As a final word of caution, note that credit card debt is such a big problem that it has given birth to a whole industry that exists simply to help you eliminate it. Credit counselors, debt management programs and financial nonprofits can indeed help you get out of a credit crunch, but take care to educate yourself beforehand and choose your credit help wisely .
Hopefully you've seen the errors of your ways (or come across this article) in time to get a handle on your bad credit habits. But is it preferable to simply do away with credit cards altogether? That depends on the budgeting skills you are able to develop and the amount of self control you possess. There are definitely ways to use revolving debt to your advantage. But only you can decide if you've got the glutes for it.