If you are “of a certain age” like I am, you may remember The Flintstones. Whenever Betty and Wilma were headed out to shop, they would hold their credit cards over their heads and yell “Charge!” ala Teddy Roosevelt heading up San Juan Hill. Over the years, having high credit limits and charging a lot of money became a status symbol of sorts. Retail therapy became a catchphrase for what is probably a shopping addiction. As a result, having a lot of debt became sort of a badge of honor.
But there are severe consequences to carrying a lot of debt. For a lot of people, that debt becomes a very heavy burden, both financially and emotionally. When debt payments are a large part of income, it perpetuates a cycle that makes it very hard to pay off the debt, or to accumulate savings that will make it possible to not have to use credit. If I’m using all my money to make debt payments, I won’t have many options if something like a big car repair comes along. I may be forced into using even more credit which is just another payment to make. We’ve gotten used to just assuming there is no other way to shop for Christmas or to travel or to buy school clothes than to use credit.
It can be helpful to think of different types of loans as tools in a toolbox. All are good for certain purposes. Credit cards are good for smaller, short term purchases. Using a credit card and paying it off every month is a good way to build payment history and thus, your credit rating. But using a credit card to borrow large amounts of money, with balances carried over month to month, is about the worst way to borrow money. Just like using a screwdriver to pull a nail, it’s not going to work so well, and someone is likely to get hurt.
Only making minimum payments on credit cards can mean taking DECADES to pay off debt, and paying a lot of interest. If I borrow $2000 on a credit card at 18% interest and only make the minimum payment each month, how long do you thing it will take to pay it? …… (insert Jeopardy theme music here)… Five years? Nope. Ten years? Nope. Twenty? Nope. Twenty four YEARS. Not to mention the interest. How much interest will I have to pay with only minimums? …. (do do do do do do do)…. More than what is borrowed. More than TWICE what is borrowed. Total interest? $4,397. Yikes. (Are you skeptical? Try it yourself https://www.interest.com/calculator/credit-card-minimum-payment-calculator/ ) Take a look at your credit card statement. Right there on the front is what’s called a minimum payment warning. It tells you how long it will take to pay with only minimum payments. It’s there because federal bankruptcy law requires it. Think about THAT for a second.
Credit card companies like it when customers only pay the minimums. That carries out the debt the longest and the interest just keeps coming in. These lenders count on us to do the minimum required, and most of us do.
So what to do if you find yourself in over your head? How do you even know if you are over your head? A good rule of thumb is if you are paying more than 20% of your income to debt payments, (not including a mortgage), you’re overextended. This includes car payments, student loans, credit cards, second mortgages, and other loans.
Believe it or not, there is a holiday for just this subject! March 21st is Credit Card Reduction Day. So let’s go over some strategies to reduce credit card debt.
- STOP USING THE CARDS. Every purchase you make just means that much longer to pay it off.
- Make payments larger than the minimums.
- Figure out your interest rates so you know which cards are costing you more, and work on paying those down faster with larger payments.
- Consider paying off smaller balance cards first to eliminate payments. Then put that money to another card.
- Use a Debt Management Program through a non profit credit counseling agency. These programs are set up to pay off in 5 years or less and often are able to get you a lower monthly total payment and lower or zero interest charges on your accounts.
If you’re feeling overwhelmed by debt, the counselors at the Center for Financial Resources can help. We look at your whole situation and help you identify options. Once you are free of the debt, then Credit Card Reduction Day becomes a real holiday to celebrate.
Contact us at 1-888-258-2227 or at www.lsssd.org to make an appointment.
Written by Sylvia Selgestad, Financial Counselor and Educator
Photo credit: http://www.blogspot.com
LSS Center for Financial Resources
Consumer Credit Counseling Service | Housing Resources | Sharpen Your Financial Focus | Financial Fitness Education
705 East 41st Street, Suite 100 | Sioux Falls SD 57105-6047
605-330-2700 or 888-258-2227
Strengthening Individuals, Families & Communities