Credit, pt. 1

As the beginning of my last undergrad semester looms near, it’s time to buy books.  Books are expensive, of course (I only needed two textbooks: “The World of Cell” and “Elementary Differential Equations”, and it cost just shy of $300), but receiving a fat student grant makes it far more manageable.

As is my tradition, I apply the leftover grant money (the bulk of it anyways) to my credit card.  This time around, I was able to pay off half of the remaining $2,600 balance with grant money. 

I have had an active line of liquid debt for 11 years — it has never once been zero’d out completely. In fact, if you think of a credit card like a stack of plates, where each purchase gets stacked on the next, and you pay them off by removing plates, then the first purchases I made 11 years ago are still waiting to be paid off!

This isn’t a “stay away from credit cards, they are TEH DANGERUZZ!!!!!” post, although I do believe people should have a healthy respect & awareness for the amount of debt they accrue. 

There are a few things I think every consumer (i.e. you) should know about credit debt, and I say this as someone that has been almost obsessively debt-minded (ask my wife) for a little over 5 years.

Thing 1: If you don’t respect your accrued debt, it will control you

We all hear horror stories about people with $20,000 (or more) credit debt. Most people I know don’t have nearly that much credit debt outstanding — more in the $1,000 – $10,000 range, t ypically. 

I’ve been fortunate enough to never break $4,000 on my card, partly from aggressive payments, and partly from re-financing and combining loans. 

If you have credit debt right now, you may find this site interesting. Type in your credit card balance and APR. If you are a “mimium payer” just click “Calculate” — if you pay a fixed amount every month (maybe you budget it in), type it in the “fixed payment” field and select “Fixed Payment” for the last question, then click Calculate.  It’ll show you a month by month breakdown of how your payment would be applied, as well as how much YOU PERSONALLY will pay in interest.

Think about that number that pops up. I have some friends with about $7,000 in debt, and their MINIMUM payment is ~$200. If they made just the minimum payment, it would take them 347 months and they pay an EXTRA $10,115.28 in interest (on TOP of the $7,000). (That’s only at 18% APR, too).

What would you do if you had an extra $175 right now? 

Phrased another way:

Could you afford to pay $50 more every month?

If you were to pay $225, instead of just the minumum $175, it would be paid off in 43 months, accruing only ~$2,500 in interest!

 

My point is, if you don’t take control of your debt finances, they will take control of you. And I don’t even mean “keep you from getting loans because your debt-to-income ratio is too high”. Credit card payments are just money you hemmorhage away every month; You see no direct benefit from it [aside from that fancy plasma TV or new video game system, or maybe the pictures from that cruise you took] — it’s just money that leaves your bank account and gives nothing back. 

Say you’re considering a new job, and you need to figure out your bottom line — how much do you REALLY need to make in order to get all your bills paid? Mortgage / Rent… utilities… estimated grocery…. credit cards…

We just naturally accept credit cards as being part of our monthly bills — but this passive acceptance is precisely how our debt controls us. 

Paying off credit card debt is ALWAYS a good use of money, as it helps liberate you from being under the thumb of your debt. As long as you owe someone money, you are not truly free. Which brings me to my next point…

Next — Part 2: How to REALLY spend your Economic Stimulus Check

Post script:

I think it’s worth pointing out an effective way you CAN use your credit cards:

Buy something, pay it off. Buy something, pay it off. etc.

Credit purchases should focus on things that ADVANCE you as a person — a better camera because you sell photo prints, or maybe some better furniture for your house. The more durable and the more use you can get out of it, the better the investment. If your payments are outlasting your usage — you’ve made a poor choice. 

$500 is the magic number.  If your balance is $500 or less, then your minimum payments will pay more substantially towards the principal balance rather than the interest. In other words: having a small balance ensures that if you HAVE to only pay the minimum payment (rough month or something), it’s still at least an AGGRESSIVE payment.