You know that making purchases using credit cards is expensive if you do not pay off your balance each month. Indeed, carrying a balance on your credit card is one of the biggest ways that people waste money each month. However, it is hard to see this, since the minimum payments required by credit card companies are so small and seem so affordable. The Credit CARD Act of 2009 has required credit card companies to list total payoff amounts, and alternatives to only paying the minimum, on statements, but many still overlook some of the issues associated with a slow repayment of credit card debt.
This infographic from Go Banking Rates offers a look at just how expensive it can be to make purchases using credit:
As you can see, there is some solid information on this infographic. I found it interesting that 60% of Americans claim that they nearly always pay off their credit cards each month. This is good news, if accurate. The fact that our society is moving toward less debt is a positive development. However, the stat that 40% of American families spend more than they earn shows how far we have to go. (I suppose it’s no coincidence that this number is the same as the percentage of Americans that do not pay off their balances each month.)
For those who do not pay off their balances each month, the financial consequences can be significant. The infographic shows that if you have $5,000 in credit card debt, at a 14% annual rate, it would take 75 months to pay off your debt. That’s a little more than six years! And that applies only if you aren’t occasionally charging more on your credit card as some of the balance is “freed up.” In the end, you will pay a little more than $2,400 in interest, bringing your total pay off amount for that $5,000 to $7,409.68.
No wonder credit card issuers prize customers that pay little more than minimum, and who continue to add charges to as they make a room. The interest paid goes straight to profits, lining the pockets of executives. Remember that your responsible behavior is not actually preferred by credit card companies; a “good” customer is one who can afford to keep paying interest on a balance.
You can reduce what you pay in interest by increasing what you put toward your debt payments. Paying only the minimum will result in a long, slow slog. The infographic shows what happens if you pay more per month. If you could pay $500 a month instead of only $100 on the $5,000 example, you would have it paid off in 11 months, and only pay $282.60 in interest – getting rid of credit card debt that much faster.
Finally, I really like how the infographic shows the real cost of common items put on credit cards. Assuming that you pay only $25 a month on some items, at 14% interest, you can see how an expensive purse becomes even more expensive on credit, and how you end up paying $1,242.89 on a $950 HDTV over the course of a little more than four years. And, of course, you would have to pay more than $25 a month to reach the minimum on a $3,500 engagement ring, but the comparison shows how failure to make ground on the principal can result in never paying of the debt (and whole new look at “till death do us part”).