Credit, pt. 2

(pt. 1 discussed how our credit debt can get out of control if we don’t take it aggressively)

Those crazy economists…

Everytime they talk to news sources about how to spend our refund checks, they always tell us to go out there and spend it on a new TV, or a vacation, or groceries, but DO NOT PAY OFF DEBT with it!!!

To be fair, I admit that I am NOT an economist, but I AM a fiscally-minded consumer. (my wife calls it “anal-retentive”)

The thing is — the “buy stuff right now to stimulate the economy!!!!” approach is so myopic. Our country, our citizens, are MIRED in debt right now. Buying all the TV’s and fancy restaurant dinners in the world isn’t going to fix THAT.

It’s sort of like having an openly bleeding wound, the doctor handing you several pints of blood, and then you trading that blood to someone else for their hospital pudding.

Thing 2: How to REALLY spend your Economic Stimulus Check

Let’s say that the average American family has about $8,000 in debt (I think that’s close to accurate).  Let’s also hypothetically say that they ARE paying $50 above the minimum payment (so $250 monthly).  So it’ll take them 44 months to pay it off. 

A family of 3 would get a stimulus check of $1,500 (assuming the stimulus rate remains the same). If they immediately apply that to their credit card, then they would now have only $6,500 left, and at $250 / month still, means they’ll have it paid off in 34 months. 

Bear with me on some simple math here: 

  • $1,500 / $250 = 6 months worth of payments
  • 44 months – 34 months = 10 months reduced

Buy paying that stimulus check onto their credit card, they have immediately reduced their payment term by 4 months. 

Now here’s the kicker… a little more math, but bear with me:

  • 4 months saved x $250 monthly payment = $1,000
  • $200 saved on the last month (final payment is only $50.20)
  • 1 monthly payment which is negated by this HUGE payment* = $250

So you are saving $250 now (by not having to make your monthly payment out-of-pocket this month) and $1,200 later. That’s practically getting your $1,500 back *AND* you’re CREDIT DEBT FREE. So every month AFTER that is $250 EXTRA that you have to spend on WHATEVER you want, basically guilt-free!

Sure, it takes 34 months (that’s 2 years and 10 months) for this to come to fruition, but think of the freedom you will have then — and it only has to happen once! And if you have any other windfalls of cash (i.e. student grants in my case)  those extra payments just make the date fall closer.

Think, for a moment, how powerful our consumers would be if all of a sudden, the majority of American families were ALL OUT OF CREDIT DEBT at the same time! You would see a humungous resurgence in our economy, as every family suddenly has $250 more to spend EVERY MONTH.  It would be like a new economic stimulus check being issued (at NO cost to the government) every six months!

THIS is s sustainable solution. Buying consumer goods in spurts is NOT.

Next —  Part 3: Dealing with Debt Collectors