Credit cards are the ultimate legal drug in a materialist culture, deceptively empowering and beautifully insulated from the feel of spending. They are designed for impulsiveness. And what comes with that impulsiveness is a set of extraordinarily harsh repayment terms. So for overshoppers, the first thing to know about credit cards is: put them away and stop, absolutely stop, using them.
Then deal with paying off your debt. In particular, don’t allow yourself to join the “minimum payment set,” that sizeable group of Americans who make only the required minimum payment each month. It comes as a shock to most minimum payers to learn that a $10,000 credit card debt may well outlive the debtor, requiring—with a 2% monthly minimum payment and an interest rate of 18%—precisely fifty-seven years and six months to repay. Total interest paid on that original $10,000 is $28,930, almost three times the original debt!
What can you do to avoid the decades of debt that go with minimum paying? Make a small change like paying the initial minimum payment each month as a fixed payment (rather than paying the declining minimum as the balance declines). The difference is astonishing. In our $10,000 example, once the first month’s 2% minimum is paid—exactly $200—the next month’s minimum drops to 2% of $9800, or $196. But instead of paying that $196, pay $200 again; and continue to do this each month, no matter how the minimum payment shrinks. Now your payoff period drops by a full half century, down to seven years and seven months. And the interest you pay drops by almost 80% to $8622, a difference of over $20,000! Pretty impressive stuff for so slight a change!
To learn how much indebted time and how much interest you could save by paying the present monthly minimum as a fixed payment, plug in your data at http://www.bankrate.com/brm/calc/MinPayment.asp
And finally, always remember…you can never get enough of what you don’t really need.
Carrie Rattle is a Principal at BehavioralCents.com, a website for women focused on mind and money behaviors. She has worked in the financial services industry for 20+ years and hopes to inspire women to better prepare themselves for financial independence.