Like many of us, I used to hate carrying cash always with me. The risk of losing cash if carried along, the convenience of plastic money accepted at all outlets, and the interest free credit period offered for the credit card; all these prompted to use the credit card where the bills could have been paid off with cash. That’s the advantageous part of it.
A credit card will always encourage spending more on occasions where one could have totally avoided opening the wallet at all! Because credit is available at an ease, there is a tendency to spend more. Thanks to the credit card, for many months I ended up spending more than what I earned that month! The convenience thus becomes a curse!
Still there is the savior, minimum payment and carrying forward the debt to the next month! Things are fine and you are happy having purchased all that you wanted and satisfied all the petty needs of the family. The process goes on until one starts living from credit card statement to statement and falls into a debt trap where the total income is paid to the credit card for the interest of the accumulated credit and the balance for the principal portion. Things are worse if one has multiple credit cards, switching between the cards, like robbing Peter to pay Paul!
Life comes to a standstill choking on credit card debt with balances accruing up to a whopping six figure. You start looking at ways to escape from the debt trap. You take up the credit card bill and start analyzing each and every expense and decide to not spend on unnecessary things, circling those unnecessary expenses, and keeping an eye on the interest portion of the dues.
The next month you have reduced the expenses and still find a hefty statement. It’s only then you start analyzing the interest portion of the statement. (Credit card issuers may even mask the interest under the title “service charges” or some “fees.”) You find that the charges are a mere 2.98%.
Okay, here is the pesky portion; that is not 2.98% annually to be “mere.” It is 2.98 per month which works out to be 2.98 x 12 = a whopping 35.76% annualized. If it’s 1.5%, then 1.5 x 12 = 18%. Credit card interest rates vary from 0.9% to 3.5% or even more at the discretion of the credit card issuer and the permitting law of the land. (Usually 0.58 to 3% in the US depending on the borrower’s credit score/history and bank’s risk evaluation methods, the average being 1.5%.)
So for a credit of 10,000 bucks, you may end up shelving from 1800 to 4200 bucks every year from your pocket depending upon the bank that you got the credit card from! Is it worth? I haven’t heard of any other business as profitable as this! Even when the most successful investor on earth is looking to grow his money just 15% year on year, you are making the credit card company rich by 42% every year dragging yourself into poverty unknowingly. (May be that’s why he was interested in including American Express in his portfolio!) That’s not all. Apart from the interest, they slap umpteen other fees and charges like late payment charges, joining and annual fees, over credit charges, transaction charges, cash advance fees, etc., on you. So do you work day and night and earn hard to make somebody rich by virtue of your uncalculated act? No other credit is as expensive and bad as this, be it a mortgage loan or even a personal loan. Why do you want to further prolong your credit card dues and overdue?
Therefore, a credit card debt is the most dangerous leverage that you need to retire first even if you need to sell something to attain that. With proper planning, determination and commitment, it’s easy to pay off your credit card debt step by step or if you already have some investments, make it in one go. Scan your investments for the lowest yield asset, be it a bond, stock, gold, or rather anything that can be sold. Sell it, terminate the credit card debt, and sleep peacefully.
It is usually students, newbies, and jobless who fall prey for this. Credit card debt is a slow poison to kill your income. If you are not into this situation, don’t ever think of getting into it. If you have multiple credit cards, cancel all of them except one for emergency purposes. Paying with cash has its own advantages, the prime one being that you ought to become frugal.
Automatically, you will be using your card sparingly hereafter! Won’t you? All’s well that ends well.
I’ve been in such a trap. Once our credit card loan outvalued the value of our house. Me and my husband worked hard for more than four years to get out of the debt. It’s a ghost that got hold of us at youth. We now use only greenback, never could imagine those horrible days again. That’s a moral we convey our kids.
I strongly agree on this. You also focus on loans as well… debt itself is a slow poison…. We can depend on recurring deposits and debit cards instead… just think… just an apprx: 200,000 loan @ 8.5% – repayment track 60 months, interest fixed, flat installments 4250 every month will amount to 250,000… and why did you need the loan, because we were not saving for five years… 4250 every month recurring deposit will amount to much larger amount but we rarely have the commitment for that… we are scared missing one installment when it comes to the same installment for a debt…
Be satisfied with what we have at present and plan well for the future… once your RD is mature get that thing whatever you wanted in a better and more technologically form…