Credit cards and other forms of plastic money are very common and used a lot these days. It is very helpful if you know how to use it, but it is also the main reason why so many people get into credit card debt. Let's look at how most people get hurt.
Many stores now offer easy payment plans for their products or services. With a small amount of money paid monthly, you can buy thousands of dollars' worth of items or go on a luxury vacation that you couldn't afford if you had to pay for it all at once. These monthly payments are charged to your credit card automatically. You only pay the minimum amount on your credit card balance each month, but you keep using it. Let's look at a case study to see how someone's credit card debt can grow and how long it will take to pay it off.
Case Study/b>/u>
Scott makes $2,500 a month, and he has a credit card with a 12% interest rate. All of his credit cards let him pay at least 3% or $10, whichever is higher. His limit on his credit card is $15,000.
At the end of this month, Scott's credit card balance is $4,550, which is made up of $3000 in principal and $1550 in interest. He usually only pays the minimum on his credit card balance, and each month he uses his card to buy gas and other utilities for an average of $500.
Let's see what happens to Scott's credit card bill:
Month 1
Balance on credit card is $4,550.00
Minimum Payment = $136.50
$500 in new credit card charges
$4,550 - $136.50 + $500.00 = $4913.50
Month 10
The balance on a credit card is $7976.02
Minimum Payment = $239.28
$500 in new credit card charges
New Balance = ($7976.02 minus $239.28 plus $500.00) = $8236.74
Month 20
Balance on credit card is $11109.85
Minimum Payment = $333.29
$500 in new credit card charges
New Balance = $11109.85 - $333.29 + $500.00) = $11276.55
Month 30
Balance on credit card is $13662.60
Minimum Payment = $409.88
$500 in new credit card charges
New Balance = $13662.60 - $409.88 + $500.00) = $13752.72
Month 36
The balance on a credit card is $14961.02
Minimum Payment = $448.83
$500 in new credit card charges
New Balance = $14961.02 - $448.83 + $500.00) = $15012.19
If Scott keeps doing what he's doing, he'll hit his credit card limit 36 months from now, instead of this month.
Let's say Scott stops using his card after 36 months and keeps paying the minimum amount each month. It will take him 19 years, or 228 months, to pay off his debt of $15012.19.
The example above is just a simple case study to show you how quickly your credit card debt can grow without you even noticing. To pay off this debt, you have to wait a long time and pay a lot of interest. In real life, many people have more than one credit card and other loans to pay off, so the situation may be even worse.
How to get rid of a credit card quickly and for cheap?
If you're already in this situation, the first thing you need to do is stop paying just the minimum. Your debt will be paid off faster if you pay more each month, but you may say you can't afford to pay more than the minimum. In fact, the easiest, fastest, and cheapest way to pay off your credit card debt is to keep making the minimum payment each month.
For example, we use the case of back Scott. This is an affordable payment for him if he can pay the minimum payment on his $1512,19 debt, which is $448.83. If he keeps paying $448.83 instead of the minimum on his credit card balance each month, he will pay off his debt in 43 months instead of 228 months. This means that Scott will be debt-free sooner than he thought, in less than 4 years instead of 19 years.
In conclusion,
Many people will always need credit cards. Use them wisely to make your life easier, but be careful with your credit card balance. Don't let this plastic money drag you into a financial crisis; the best thing to do is pay off the balance in full every month.
