Financial Education
Credit cards: Are you ready to be debt free?
A sergeant first class needed additional cash for a family vacation before he was deployed to the Persian Gulf. The sergeant had a good payment history and a solid rank in the military. One would think the lending company would grant the sergeant a loan.
However, his credit report generated too many red flags. His total reported debt exceeded $21,000, including nearly $7,300 in charges during the last eight months. Over the years, he had increased his use of credit cards and "quick credit" to pay for his lifestyle. But within the last eight months, he had obtained credit from payday loan companies and "maxed-out" his credit cards. Now, the sergeant could only afford to make minimum payments on his debt.
Reality Check
Using credit or charge cards to pay for purchases is a fact of life in today's economy. Credit cards are convenient and easy to use. But when something is too easy, people sometimes abuse it. Knowing when you're over-your-head in credit card debt and when to seek help is key in your quest for financial freedom.
Consumers receive many unsolicited phone calls and direct-mail applications that promise "approved" credit lines. In addition, retail outlets attract new charge card customers by promising them exciting discounts if they open an account. With the ease of obtaining credit, consumers may find they have more lines of credit than they can reasonably control.
The average American has seven credit cards, owing an average of $2,500 per card. Do you hold one credit card, two, or more? More importantly, do you pay off each of your account balances monthly? If you don't, then you're one of the 65 million Americans making monthly payments and possibly drowning in debt.
Paying the Minimum
You're paying the minimum payment on your credit account. Sure, you've skipped a payment or two or sent a payment a couple days after the due date. If you keep paying the minimum, you'll pay off the balance some day, right?
Wrong. Statistics prove that paying the minimum payment on credit cards merely covers the costs of having credit. The "hidden costs" buried within the disclosure text can be confusing. A large portion of this fine print states what fees will be charged on a monthly basis for late charges or for exceeding credit limits.
Consider the following example, where a consumer has a $5,030 balance and a $100 minimum payment. In this example, a $100 payment hardly covers the finance charges and fees.
| Category applied to | $100 payment | What's Left | |
|---|---|---|---|
| Late charges | $15 | $85 | |
| Unpaid finance charges | $28 | $57 | |
| Fees (over limit fee, returned checks, etc.) | $10 | $47 | |
| Outstanding balances previously billed | $47 | $0.0 | |
Let's say you had $1,000 on a credit card with a 12 percent interest rate. By paying three percent of your account balance (keep in mind that most creditors require a minimum payment of $10), it would take you eight years (96 payments) to pay it off! After eight years, you would have paid $407.48 in interest.
You can find out how long it will take you to pay off your debt by entering your information into a free debt calculator.
Solutions
Know your situation
Information can be one of the best ways to fight against overwhelming debt. By knowing what you're getting into beforehand, you can prevent many of the bad financial decisions that people make.
Pay it off
In the example above where you had $1,000 on a credit card, you would be better off if you had a fixed rate loan of $1,000 at virtually any interest rate. Even at twice the credit card rate (24 percent), the charges would have only resulted in $134.72, compared to $407.48 on the prior credit card example. But how would you know that? You would by consulting with a professional who cares about your financial interests.
Seek help
By consulting with a financial professional, you can figure out how much in interest and fees you are paying and create a debt-elimination strategy. Consulting with a financial advisor, either on your military installation or in your community, allows you to find out how much you owe creditors, what your credit report says about you, and how to eliminate debt.
In the end, you can get out of debt. Just realize that it won't happen overnight, and requires a long-term commitment to taking control of your finances.
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