The average American household that uses credit cards carries a , which, in the grand scheme of things, is not much debt. The problem is that credit cards have such high interest rates, making a few thousand dollars in debt nearly insurmountable.
Like many bad spending habits, small scale purchases – a new gadget, a few drinks out, a pair of jeans – get us into big trouble.
Let’s take three different looks at this seemingly little problem.
1. Percent markup. If you stopped using your credit and started only paying down the balance, making minimum payments of 3 percent or $25 a month (whichever is more) on a balance of $10,679 at a 15 percent interest rate will take 188 months.
That translates into 15.6 years and extra payments of $7,284. So in the end, $10,679 worth of instant gratification costs you $17,963, or 68 percent more than the original cost. Next time you are oggling a fantastic consumer good that will absolutely complete you ask yourself if you are willing to pay 68 percent more. Makes it easier to say no, right?
Got a slightly different interest rate or balance?of your minimum payment.
2. Lost buying power. Ironically, the $7,284 you are giving to credit card companies to get the good things in life – STAT! – is money you could have spent on the good things in life…later.
That $7,284 in interest could buy over 15 years:
- One very fancy dinner every three months (at $140 per dinner)
- 145 pairs of new shoes (at $50 per pair)
- 18 months of groceries (at $400 per month)
- Approximately ten percent of your yearly IRA contribution
- 87,408 miles of driving in a car that gets 30 mpg at $2.50 per gallon
3. Dreams deferred. Paying extra interest also detracts from the real American dream – retirement. A couple in their mid-30s that invests the $7,284 in even yearly payments ($485 over 15 years), could earn an extra in a Roth IRA account. That assumes 10 percent returns over 15 years, which historically is not unreasonable.
Thanks, Dad and Hubby!