If you’re a credit card user you probably use your credit cards for a variety of reasons such as convenience, to get you to the next paycheck when you run out of cash, or even to earn rewards like hotel points or air miles.
Whatever your reasons for using the demon plastic (by the way, I HATE credit cards) I want to tell you about a little trick that the credit card companies use that may seem innocent at first, but is designed to keep you in perpetual debt.
This little trick is a technique that seems pretty innocuous at first, and some people even look at it as a convenience that the credit card company provides as a guideline as to how much to pay each month. What is it?
It’s called the “minimum credit card payment”.
Minimum Credit Card Payments Are Not Your Friend
If you’re one of the credit card using majority that carries a balance from month to month, you may believe that the minimum payment is your friend. You’re thinking that as long as you can afford that minimum payment, you can afford to keep using the credit card and everything is ok.
Some people even manage their credit card debt according to the minimum payment that the credit card company calculates for them. If the payment starts getting too high, they cut down on using the credit card and pay down the balance to get the minimum payment back down to an “affordable” level. That brand of money management seems to make sense to a lot of people in our “how much is the payment?” society.
The better question we should be asking is “how much are these credit card payments really costing me?”
So let’s find out just how much it really is costing you.
First, let’s assume that your household is an average American household. According to Credit Cards.com the average credit card debt per household with credit card debt is $15,956 (I’ll round that up to $16,000 for demonstration purposes). Let’s also assume you have an average APR (Annual Percentage Rate) of 12.78% on your credit card debt.
Now let’s break out the handy dandy Credit Card Repayment Calculator from the Federal Reserve.
If you make that easy, affordable, minimum payment on that credit card debt, your payment would be $320. When you finally get the credit cards paid off (assuming you NEVER use your credit cards again during that time) you would have paid off the entire $16,000 in credit card debt plus $17,522 in interest for a total of $33,522.
For all that stuff you paid for with those credit cards, you ended up paying more than DOUBLE the actual cost.
How long will it take you to pay it off using the minimum payment?
That’s 31 years to pay off those happy meals and latte’s.
31 years to pay off the cute shoes and gas for the car.
This, my friends, is STUPID!
If you’re paying minimum payments on your credit card debt, or if you’re using credit cards at all, you have to wake up at some point and realize the credit card companies will always find a way to keep you in perpetual debt. That is their job and they do it well.
You have to get away from the “how much is the credit card payment?” mindset and start asking “how much is this going to cost me?”. When you start realizing just how much credit costs you and the lengths that the credit card companies will go to in order to keep you in perpetual debt, you’ll start running away from them faster than Usain Bolt running the 100 meters.
Remember, using cash is always the best deal out there and being debt free is the best financial plan that will ensure that you perpetually succeed with money.
If you’ve decided that it’s time to turn the corner financially, you may want to check out my Celebrating Financial Freedom self study course. It will show you how to take control of your cashflow and put together a get out of debt plan that you can stick to so you’ll never have to deal with those “easy minimum payment” demons ever again.