– Charlie Munger
If you're tempted to charge a $2,000 item now on your credit card and pay around $40 for it per month, you might find that's not the best way to use your money. While it's true you can likely afford a $40 payment per month, you will end up paying much more for your item than you would ever consider paying for it with cash.
When you think about making purchases with credit, the question to ask is not: "How much will my monthly payment be?" The real question is: "How much is this debt going to cost me?"
Learning the cost of your debt can help you break free from it.
Most people know how to use credit cards to make a purchase. They also understand that having a credit card and using it responsibly can actually help them build their credit over time and improve their credit score.
However, what many people fail to understand is how much credit cards actually cost the average person over time. According to a 2018 CreditCards.com survey, 48 percent of balance-carrying cardholders are either unsure or unaware of the interest rate on their cards, and 25 percent of those same respondents admitted to carrying a balance on at least three different cards within the past six months.
Ed Mierzwinski, senior director at the U.S. Public Interest Research Group (PIRG), noted about those numbers:
Having a credit card does not necessarily mean that people know how it works. In fact, some of the beliefs people have about credit card interest and fees are not only incorrect but also potentially quite costly.
Let's look at an example to figure out exactly how much a given amount of credit balance will cost you over time.
Suppose you make a $2,500 purchase, with a credit card carrying an 18 percent APR. The two percent minimum payment requirement means that you only have to pay $50 per month. Here's what will happen:
With a principal balance of $2,500 and interest in the amount of $2,155.55, you will end up paying a total of $4655.55...and it will take you 7 years and 10 months to pay off your debt!
If that amount surprises you, consider that this is not even the worst-case scenario. Some cards carry APRs higher than 18 percent. Then, if you happen to miss payments at any point, some credit card providers will raise your interest rate even more and charge late fees or penalties as well.
All of this is not to say that you should not have a credit card or two. However, if you do have credit cards, you owe it to yourself to learn how to manage them wisely. How you manage your credit cards can impact as much as 30 percent of your credit score.
Using your credit cards responsibly by carrying no more than a small balance, never missing a payment, and paying off your entire balance when possible can improve your credit score.
Your credit score will take a nosedive, however, if you:
Credit card management is an essential skill.
If your credit card debt continues to mount and you are struggling to make even the minimum payment due, it's time to do something about it. Why spend even one more day trying to fight this battle alone?
Give ClearOne Advantage a call at 888-340-4697 and a Certified Debt Specialist can help you determine where you are with your financial situation today and where you want to be tomorrow. In about 20 minutes, they can walk you through a financial assessment and come up with a personalized plan to help you regain control of your finances – with a payment designed to fit your budget.