Harry N. Stout
176- Pitfalls of Making Minimum Payments
Do you only make minimum payments on your credit cards? Do you occasionally miss a payment? Do you know how much these actions will cost you? The reality of credit card debt was re-enforced to me when I opened my statement for last month. The interest rate and terms of the card are not something I have focused on as I use my cards as a convenience and way to gather rewards points. I use the points for travel and merchandise. I wanted to use this post to highlight what only paying the minimum payments can cost you.
Debt and the Pandemic
In a survey conducted December 9–21 by the U.S. Census Bureau, more than one-third of American adults (36%) said they had found it somewhat or very difficult to cover regular household expenses in the previous seven days. This includes making rent or mortgage payments and buying groceries. Even the 18.1% of American adults with incomes between $100,000 to $149,999 reported finding it somewhat or very difficult to cover those expenses.
The same survey also sheds light on how millions of American adults are making ends meet during the pandemic:
28.3% had turned to credit cards or loans to help cover spending needs in the previous seven days.
26.5% had turned to money from savings or asset sales to help cover spending needs in the previous seven days.
13.8% had borrowed money from friends or family to help cover spending needs in the previous seven days.
Good and Bad Debt
As I have written in my books and posts, you should use debt to invest in the long-term assets in your life (e.g., your college or technical education that generates your income, buying a home, buying a vehicle for work). You should not be depending on credit cards to pay everyday expenses unless it is a dire situation. It is simply very expensive to borrow from this source. According to the Federal Reserve’s January 8, 2021 release, the average APR (annual percentage rate) for an interest-charging credit card was 16.28% in November 2020.
The Stark Realities
The cost of this type of debt was driven home to me when I opened my credit card statement for last month. As noted above, I pay off my statement in full each month and do not incur any interest costs.
Here were two disclosures from my statement that really made me think. The first was this - Late Payment Warning: If we do not receive your minimum payment by the date listed above, you may have to pay a late fee of up to $37.00. A pretty hefty fee to charge in addition to interest. The second disclosure was the shocker - Minimum Payment Warning: If you make only the minimum payment each period, you will pay more in interest and it will take you longer to pay off your balance.
For example: If you make no additional charges using this card and each month you pay only the minimum payment of $405 you will pay off the balance shown on this statement in about 22 years at cost of $25,405 versus paying it off in 3 years at a cost of $14,580 for a savings ($25,405-$14,589) of $10,816. By making just the minimum payment it would take me 22 years to repay my debt. Yes 22 years!
We live in a world of 0% interest rates on the money we save. The major banks charge over 16% interest on credit card debt with some banks much higher. It makes no sense for anyone to voluntarily agree to pay these rates unless they need the money for a medical emergency or major household crisis. You just have to pay more than minimum payments. Please go through your budget and cut back as much as possible to pay down your credit card balances. It will save you more than you know.
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