The insanity of having Credit Card Debt
“All the lessons of history in four sentences: Whom the gods would destroy, they first make mad with power. The mills of God grind slowly, but they grind exceedingly small. The bee fertilizes the flower it robs. When it is dark enough, you can see the stars.” — Charles A. Beard
Charles Austin Beard was an influential historian in the early 20th Century. In the above quote, he referenced a line of dialog from an ancient Greek play by Sophocles, Antigone written around 441 BC. The first time I ever saw the phrase, it was the title of a 3rd season episode of Star Trek. Years later when I was a college student I used to collect pin buttons which I’d display on my denim jacket. One day, I found a pin that read “Those whom the gods would destroy are first issued credit cards!” This is my all-time favorite button and I still have it in my collection.
Americans are addicted to credit cards, and the resulting levels of debt have caused much heartache and suffering in our society. Debt is a form of slavery that can last for decades. Like most forms of addiction the young and stupid are usually the easiest to hook.
My first credit card was from SEARS and I applied for it in college. The very first item I purchased was a silver metal $50 Phasar watch very similar in style to the black plastic Casio watches I’ve worn for the last 25 years. By the time I left college, I had 19 different credit cards.
The problem with credit cards is that the average person tends to use them for everything, especially non-essentials that they really didn’t even need in the first place. Before long, one card is maxed out, an new card is applied for, and the vicious cycle of mindless consumerism continues.
“Scientists have developed a powerful new weapon that destroys people but leaves buildings standing — it’s called the 17% interest rate.” — Johnny Carson
The average credit card has an interest rate of between 17% to 22% and can easily rise to 29.9% when you start having late or missed payments. At 17%, your debt is doubling just over every 4 years according to the Rule of 72, discussed in last week’s post. When you add to this the fact that the average monthly minimum payment is only about 1% of the balance, by paying the minimum on a high balance you can spend decades to pay this debt off! Keeping a balance on a credit card is rarely a good idea.
“The rich rule over the poor, and the borrower is slave to the lender.” — Proverbs 22:7 (NIV)
When a lender is issuing you credit, they are NOT doing it because they like you and you deserve it. They intend to profit from your debt. Credit cards are the WORST form of debt, and it’s very easy to hit many of the traps that are outlined in all the fine print on the application form. Often you will be presented with a low introductory rate to encourage you to run those balances up, so that you can be charged insane amounts of interest as you struggle to pay back the debt after the promotional rate expires.
Most people do not consider this , they just ignore the fact, and continue to charge additional debt until they eventually hit the limit on one card, then just apply for another until they’ve manage to trash their FICO credit score so badly that only loan sharks will lend money to them.
Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it. — Albert Einstein (No, not really, but I made you laugh this is REALLY an anonymous quote! )
In 2009, the government passed the Credit Card Accountability Responsibility and Disclosure Act of 2009. the law states that credit cards statements must contain the following info:
- The warning: “Minimum Payment Warning: Making only the minimum payment will increase the amount of interest you pay and the time it takes to repay your balance,” or a similar statement.
- How long it will take and how much it will cost to repay your balance if you only make minimum payments.
- How much you must pay in order to pay off your balance in three years or less.
- A toll-free number where you can get information about credit counseling and debt management services.
24 years if you pay only the minimum! And even if you paid 3.625% instead of 1%, it will take 3 years and cost $2659.36 in interest! No thanks, I’ll pay the balance in full and pay $0 in interest. It’s always best to pay your balance in full each month. If you can’t afford it, don’t buy it!
Here’s a handy chart to show how many payments it will take to pay off your debt at several percentages of the balance with various interest rates:
MONTHLY PAYMENTS YOU NEED TO PAY OFF YOUR DEBT
SOURCE: “Get a Financial Life: Personal Finance in Your Twenties and Thirties,” Beth Kobliner
A credit card is a tool. It can make your life easier if used wisely, but if you misuse it your life will become a living Hell.
As I said in an earlier blog, I went through a tough 18 month period seventeen years ago, ended up $50,000.00 in debt and trashed my FICO score. Bad things just kept happening and my life spiraled out of control quite fast. It took a lot of work, wise council, and study to get me to where I am today. I am debt free. My credit cards are all reward cards, and the balances are paid in full at the end of each month. I actually get PAID to use my credit cards. It’s a wonderful feeling not to have to live in fear of the monthly bills in the mailbox, because I have enough emergency money socked away that I never need to worry. I hope that through continued reading of my weekly blog, I will be able to distill some of my accumulated wisdom to help you reach the same pinnacle.
As always I wish you happiness and success!