Let’s focus on credit card debt. First, we’ll consider the upsides of using a credit card. Anyone who has ever had a critical incident, such as a car breaking down while traveling, can attest to the value of having a credit card on hand. Having a credit card enables us to carry less cash and we will receive a written or electronic accounting of spending activities each month. Using a credit card and making timely payments builds one’s creditworthiness. Other benefits may include discounts through cash back plans and redeemable points for travel or merchandise. Further, if you have a problem with a creditor the credit card company may act as your advocate. Of course, credit is a very useful privilege and should be treated as such.
Clearly, there is a powerful attraction to debt. In two words, immediate gratification. Marketers are a persuasive lot. We are constantly encouraged to spend beyond our income levels for consumable goods and sometimes durable goods. As a matter of fact, without credit most people could not enjoy their current lifestyle.
Debt reduction is a popular theme today given the harsh reality checks of the pressures of too much debt. Paycheck to paycheck is not a viable financial plan. Let’s consider credit card debt and failure to reduce balances. The example that follows assumes data which are based on a customer with an excellent credit rating.
Credit card balance Minimum Monthly Payment
Note that with the minimum payment the account balance will take 14 years to payoff. Total payments for the account will be $6,895. Next, consider the consequence of a late payment. “If we do not receive your minimum payment by your due date you may have to pay a late fee of up to $38.” Wow! That’s more than the minimum payment. Also, all of your interest rates may increase if you are a repeat offender with tardy payments.
If the credit card is continuously used and only minimum payments are made it will be a financial burden that will increase exponentially. Most credit card charges are made for consumable products which means the items purchased are, in all likelihood, long-gone before being paid for. Consider gasoline, restaurants, and groceries. Used up, gone, consumed within short intervals, but the payments remain. Fact: There is no way such a scenario can help with wealth accumulation.
Generally, savings rates are between 1% and 2%. Credit card rates are 15% plus with additional fees. The cost of debt is contingent on the credit rating of the individual.
According to the Federal Reserve average household credit card debt is about $6,700. That’s quite a lot to carry for the long-term.
Some practices our readers have used to jettison credit card debt follow.
- List each account with its balance and interest rate. Highlight the worst of the lot and target it for elimination. Never use it again. It’s a plastic leech.
- Negotiate a lower interest rate that is competitive with others.
- Stay focused on the really bad account and plan to get rid of it!
- Have an action plan to dump the debt.
- Be able to pay the account balance in full within 30 days or don’t buy.
- Entertain at home.
- Use coupons to cut charges.
- Charging… just don’t do it!
- Stop dining out.
- Pay cash whenever possible.
- Practice conservation.
Remember, consumer spending is still the engine that drives economic growth and will always be encouraged by marketers. Personal consumption is nearly 70% of the GDP. Conversely, savings are relatively nominal. Some will save, and others will spend beyond their means, resulting in an accumulation of debt that reduces or eliminates the possibility of financial independence. Recall the proverb that was expressed by Benjamin Franklin in his “Way to Wealth” essay, “The borrower is a slave to the lender.” We must exercise control.
Be sure to follow the Millionaire Choices advice columns for your personalized lifestyle enhancements.
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New York Times bestselling author William D. Danko and Richard J. Van Ness, wrote the research-based book, “Richer Than A Millionaire ~ A Pathway to True Prosperity,” which shows the way to wealth and happiness through embracing traditional values. Washington Post’s Michelle Singletary selected this book as, The Color of Money Book of the Month. The $8 billion Vanguard Charitable fund website features our book.
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