Plastic Money – when Debt comes disguised as Wealth!
A few days ago, one of my close friends asked me a simple question on how she could calculate her current months interest on her credit card. My first question to her was “What is your APR?” to which she responded “I’m not sure, where do I see that?”. This little conversation led me to understanding how most people end up having huge amounts of credit card debt during their lifetime.
Below is the chart showing the total US Debt, where student loan debt was the number one reason. I have discussed the issue of student debt in another post, and I intend to combat the massive number of over $830 billion in credit card debt with this topic.
This graph from the Federal Reserve Bank of New York’s Center for Microeconomic Data shows the non-housing debt balances by debt type.
Without complicating this issue with minute details and banking jargon, let’s just start with a simple example.
As of June 1, 2018, consider that I owe $1000 on my credit card. Oy June 10, I spent another $200 and $300 on June 25. What do you think will be the interest I will need to pay on my billing statement this month?
Beginning balance = $1,000
APR = 16%
Note that although APR stands for Annual Percentage Rate, this rate is applied on a daily basis. Therefore the daily rate is 16%/365 = 0.04%
At the end of the billing cycle on July 1, 2018 this daily rate is multiplied with the average balance held over the entire billing cycle. Here’s the calculation:
(Beginning balance x no. of days until next purchase) + (new balance x remaining days) ÷ number of days in the month
($1000 x 10) + (($1,000+200) x 15) + ((1,200+300) x 5) ÷ 30 = $1,183.33
Multiply this average balance with the rate calculated before and total number of days
$1,183.33 x 0.04% x 30 = $14.2
While paying $14 interest does not sound too much, this value will keep increasing over time to thousands of dollars, the calculations to which can be nerve wrecking. Now that it is clear how bank’s charge this interest, our goal is to completely avoid being charged any interest at all. So how can you get out of credit card debt? Here are some key points to consider:
1. CREDIT LIMIT AMOUNT IS AN ILLUSION
When you sign up for a credit card, the bank often asks your annual income. This allows the bank to determine if a cardholder is capable of making the monthly payments and avoid a default. However, even if a person’s monthly income is no more than $5,000 a bank will often offer a higher credit limit such as $10,000 if all other parameters are in good standing. What does this really mean?
Banks make money when customers do NOT pay their credit card bills. The interest you pay is money earned for the bank, which is why offering a higher credit limit is only tapping into the weakness of overspending. It is important to realize that this credit limit is an illusion of wealth that make a customer go beyond their means and overspend. Stop being exploited for an illusion to drag yourself into the hole of credit card debt.
2. THE MINIMUM PAYMENT SCAM
Credit card monthly statements require customers to only make minimum payments even when the total charges can exceed a thousand dollars. These minimum payments of less than $50 look attractive as it tricks a consumer into spending more by paying less. The less you pay, the more interest a bank accumulates, and the poorer you are down the road. Never make the minimum payment and promise yourself to completely pay off your monthly bills.
3. UNFORESEEN CIRCUMSTANCES
There are times when we are faced with events in our life where being on a strict budget or maintaining that credit card balance can be daunting – a medical emergency, a big wedding or an expensive gift. However, even if you cannot pay off the entire balance on your card, make it your number one goal to pay off in a limited time frame. This will save you hundreds of dollars over time and remind you to set aside a nest egg for such future emergencies.
4. USE CASH, IF PLASTIC IS ADDICTIVE
If you still find yourself spending beyond your means, buying every attractive thing available on the market, switch to cash! The moment you realize your pockets no longer have that extra $5 bill to pay for a gallon of milk, the embarrassment will trigger that much needed shot of frugality and budgeting. Some embarrassing situations can be life savers and help you ditch that plastic right away!
Be Frugal, Be Smart, Be Rich!
#Money #selfhelp #Planning #SavingMoney #FinancialIndependence #creditcarddebt #finance #Debt #personalfinance #FinancialFreedom #PersonalGrowthandDevelopment #SelfImprovement #empowerment #PayOffDebt