Think back to that exciting day when you were approved for your first credit card. Perhaps your parents co-signed for you or perhaps you managed to get one with a small credit limit on your own. Either way, you were on your way to adulthood!
BUT, did you ever stop to think about what you were getting yourself into? Did you even look into the credit card's interest rate and service fees before you applied? Most credit card interest rates are between 15 and 25% these days. Have you done the math to determine what that means? Let's go through an example.
So, you're in the store looking at that brand new digital camera which retails for $349 and is on sale for $299. You absolutely LOVE it! You don't have the cash in the bank to pay for it right now so you decide that brand new shiny credit card in your wallet will do the trick. After all, you can't miss this sale, can you?
Within a few weeks, your credit card statement arrives. On the statement is the $299 for the camera (ignoring the fact that you really would have paid taxes on that as well). You still don't have the money, so you decide to make the minimum payment this month and carry the balance forward. Another month goes by and here comes another statement. Strangely, you still owe them $299 for the camera? How can that be? Didn't you pay them something last month? Yes, you did. But have you ever stopped to wonder what the minimum payment is based on? It's the interest on the amount you owe them, such that paying the minimum amount means you have paid them money but are absolutely no further ahead than when you started! That camera is getting more expensive by the day isn't it? Not really worth it, is it?
Now think of those people that are carrying thousands of dollars as a balance on their credit card. They're paying between 15 and 25% and racking up the charges each month. Let's think about this. What is the interest rate on a loan at the bank? Single digits, isn't it? And hard enough to pay off, isn't it? So why would you EVER carry a balance on a credit card knowing that they're so much higher in interest? Insanity indeed!
And now, one of the craziest questions I have ever been asked. You're carrying a balance on your credit card which we have now discovered is likely at 15%. You get paid a bonus at work for doing a good job and they give you $500. You wonder, should I pay down the credit card balance or invest in a bond? Oh my goodness people, look at the math! If you buy a bond, you might get 2% interest. You're being charged 14% on the credit card. Easy decision...pay down that credit card!
In over 40 years, I have never ONCE carried a balance on a credit card. I have never purchased anything without having the money already in the bank to pay for it. A credit card to me is just a way for me not to carry around cash. If you don't have the discipline to do this, then cut up the credit card and live off cash for a while. You'll find budgeting to be much easier.
I hope this helps our debt-filled society.
| Click below to view another article by this author on personal spending: This author is the owner of http://www.numericalinsights.com |
No comments:
Post a Comment