What Do Your Credit Cards Really Cost?
By Rosemary Carlson
Spring 2007
How many credit cards do you have in your wallet? What are they costing you?
The average American has five or six. That includes bank cards such as Visa or MasterCard, department store cards, gasoline cards and general-purpose cards such as American Express. If each credit card has a $2,000 line of credit, that means we have $10,000 to $12,000 in credit available to us, on average.
Consumer debt in the U.S. is at an all-time high. Household spending is rising faster than household income. That means people are borrowing more and more money to finance their spending habits, a lot of it by using credit cards.
Unfortunately, we have grown accustomed to whipping out that piece of plastic for any little purchase we want to make without much thought to the consequences. Good money managers try to use credit cards just to pay for emergencies, such as a big auto repair bill, or large expenses for which they do not have enough savings. But if we have maxed out our credit card limits by making lots of little, non-essential purchases, we may not have the credit capacity to take care of those emergencies or big-but-necessary expenses.
On top of that, many of us have two other credit card problems. First, we have only enough disposable income to make the minimum payments. Or we think that's all we really need to pay. Second, credit card interest rates do not necessarily change much when market interest rates change. Many cards maintain interest rates of 19 percent to 23 percent, sometimes higher if you have had late payments or over-limit fees.
How much is all this credit costing you?
For the sake of simplicity, let's look at just one card. Let's say you have a balance of $3,000 on one of your bank credit cards and the interest rate is 19 percent. Let’s also say that you must make a minimum payment of 2.5 percent of the balance every month – that starts at $75 per month. Of course, the minimum payment will drop every month as you pay down your debt, as long as you never make another charge on that debt.
However, consider what happens if you pay only the minimum month by month as it goes down from $75 to $69 in 10 months, to $62 in 20 months, and so on. If you make only that minimum payment month after month, it will take you a shocking 283 months to pay off that one debt – more than 23 years – and you will have paid $4,729.44 in interest.
And that’s for just one card with a $3,000 balance! Multiply that by four or five more credit cards, and most of us would have a credit problem.
Instead, let's say that, after reading this column, you decide you can set aside $100 every month to pay off that $3,000 debt. In this case, you will have your credit card paid off in 42 months and the interest expense to you will be reduced to $1,101.73. You would shave more than 20 years off your debt repayment and more than $3,600 in interest expense.
Take a look at your credit card balances, interest rates and minimum payments. Pick one, preferably the one with the highest interest rate, and start paying off that debt with as much as you can reasonably afford per month. Then, move on to the next one.
In the meantime, try to use your credit cards only for necessities and emergencies. You will pat yourself on the back someday for your good money management.
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To Boost A Bad Credit Score…
- Review your credit reports to make sure they’re accurate. You are entitled to a free report from each of the three main agencies – Equifax, Experian and TransUnion – once a year. Visit www.annualcreditreport.com to obtain the reports. But you’ll need to pay a fee – usually $5 to $10 – to get your scores.
- If you find mistakes in the report, dispute them in writing with the agencies. The credit bureaus must respond within 30 days.
- Stay current in paying your bills, and reduce your debts.
- Close unnecessary lines of credit, but try to keep your longest-running accounts. Don’t open new accounts.
