The Biggest Credit Mistake Ever!

And no, the biggest mistake is not that we use credit but rather how we use it. It’s hard to go through life without using credit and some of us use it more than others. But there is one huge problem most of us have. We look at what we can afford to pay and not the cost of credit. Sometimes we don’t want to know the total cost but that oversight costs us dearly.

Ever go to purchase a car or major appliance, look at the price and immediately ask what the payment would be? You’re not alone. Most people determine if they can purchase something based on their comfort with the payment. Remember when the first question a car dealer asked was what color car would you like? They’ve moved with the times and today’s first question is: how much of a payment are you comfortable with?

The American philosophy seems to be, keep buying until you’ve used up your spendable income, and sometimes way beyond that. Credit cards have given us the ability to keep spending until we run out of ways to juggle payments, transfer balances or consolidate debts. This green light for spending is putting us in bondage and many families will never recover.

Consider these facts on interest! Typical credit card “minimum payments” (which most people make) are about 2.5% of the total owed. Well, that doesn’t seem too bad, until you consider the effect of the interest rate. Interest on a $10,000.00 debt can be staggering. Let’s look at the options:

0% Interest:
At 0% interest the minimum payment is $250.00 per month and it will take 3.3 years to pay it off. If you can afford it, adding $100 to the monthly payment pays it off in 2.3 years.

9.99% Interest:
By today’s standards, 9.99% is a reasonable or at least acceptable interest rate. That same $10,000.00 debt still has a minimum payment of $250.00. But $83.33 of that payment is interest and $166.67 goes toward paying off the actual debt. At that rate it will take 20 years to retire the debt at a cost of $4,888.25 in interest alone and a total cost of $14,888.25.

Are you ready for a shock? If you can afford to add $100.00 to the payment and pay $350.00 monthly, the entire debt pays off in 2.75 years with a total interest charge of $1,468.93. That is a savings of 17.25 years and $3,419.32 in interest charges. That is what minimum payments cost you!

19.99% Interest:
It gets worse. Interest rates are climbing and 19.99% is not uncommon. Now our $10,000.00 debt still has the minimum payment of $250.00 but it will take 37.6 years to pay off and the total interest cost is $19,465.67. In this scenario the total cost of the $10,000 debt is $29,465.67.

Are you ready for an even bigger shock? If you can afford to add $100.00 to the payment and pay $350.00 monthly, the entire debt pays off in 3.3 years with a total interest charge of $3,692.44. That is a savings of 34.3 years and $15,773.23 in interest charges. Making minimum payments is costing you over $15,000.00 in interest. What else could you have done with that money?

For years it’s been easy to make those purchase decisions on what we thought we could afford and not look at the ultimate cost of that purchase. One client had about $100,000.00 in credit card debt. He was adamant that he didn’t want to know how much interest he was paying per month. His staggering interest bite was about $1,300.00 per month. That is more than a house payment in many parts of the country. This was just money going to credit card companies with almost nothing going to principal to reduce his debt level. His anxiety was well earned.

Many of us live in that same world of denial and it usually takes a huge mental and often physical toll.

Conclusion: It’s OK to ask about the payment but also ask about the total cost of the purchase. And NEVER make minimum payments. Making minimum payments is a killer. Consistently pay more than the minimum payment and you save hundreds to thousands of dollars in interest. Winning the Lottery is probably not in your future so learn to squeeze more out of the money you have.

For more tips on credit check out: http://creditgnome.blogspot.com