Monday, February 16, 2015

Why Is Credit Card Debt So Bad?

Credit cards are wonderful. A credit card can run for your life. Without having to carry money, you enable yourself to buy something—almost anything—in the very moment, you need it. If that thing takes place at an ambulance ride, it could literally save your life. But, the debt that accumulates as a result of credit card purchases can weigh you down like an anchor.

Because credit cards are so easy to obtain and easy to use, they seem harmless—even helpful. Many people use cards seasonally for vacation or holiday shopping and manage each year to repay the seasonal debt before the next year rolls around (just a few thousand dollars of savings could eliminate hundreds of dollars wasted on interest each year). Others fare even worse. Some people are not in a position to stop spending when their ability to repay is reached and the debt begins to mount.

Credit cards are intended to be flexible. They feature low minimum payments that in some cases barely cover the interest charges with the result that a $10,000 credit card balance could theoretically take decades to repay. As a consequence, their flexibility is a part of the problem.

They also feature relatively high interest rates. If your card is under a grace period, you’ll likely be paying more than 12 percent yearly interests (if you have good credit). If your credit is marginal, you could easily be paying above 20 percent. If you make late payments, you could be paying more than 24 percent interests. Compare that to a mortgage or a car loan at around four percent.
Credit card interest, unlike mortgage interest is not tax deductible. This renders it effectively more expensive.

If you allow your credit card issuer(s) to let you find out when you can stop spending by bumping up against your limit, you may be in a position to control your spending, but at a high cost. If you could instead control your spending at the level allowed by your income supports with no credit card debt—that is, if you didn’t have the credit card loans on which you’re paying that interest, you’d have much more money to spend.

For instance, if your credit card limit amounts to $10,000 and you keep your balance near that level, without being given off each month, you could be paying about $200 each month for interest. That accounts for $2,400 per year. That’s a lot of wasted money. Would that fund, a nice vacation for your family? How about a nice Christmas?

Even when you’re in control, credit card debt may be taxing you painfully. If you’re out of control, you’re constantly applying for green cards, asking to have your limits raised and otherwise adding to your credit card balances every single month, you may be directed to a financial cliff without realizing it. One day, there will be nothing more credit available and you may go right off the edge.

Credit cards are fantastic devices that facilitate safe spending. Even having a source of emergency credit makes sense and is a part of prudent family living. Borrowing on credit cards seasonally isn’t the best way to be paid for intermittent expenses—savings are. Borrowing just a little bit more every month is painful, slow financial suicide. Step away from the cliff. Get control of your credit card debt before it gets control of you.



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