The Long-Term Cost Of Credit Cards

Does your mailbox fill with a blizzard of pre-approved credit card applications each week? They sound like tempting offers, promising a low interest rate if you transfer the credit balance on your present card. They dangle great offers to entice you to add an equity line of credit on your house. They urge you to add a second line of credit to pay off all your debts, to take an exotic vacation, to buy a shiny new car. They chant “buy now, pay later.” They make it easy to get into debt.

The average U.S. consumer does not realize the true cost of debt. Stop and think: Why are credit card companies mailing you that blizzard of charge cards? Why do they offer home equity loans and multiple lines of credit? What’s the catch?

If people really understood the cost of debt, they would cut up their credit cards, pay off the charges and never use revolving credit again.

Avoiding debt is hard because we live in a world where the media and its moneybags—the advertisers—tell us that we need to have all the things we desire—right now!

We live in a world of instant gratification and don’t want to wait for anything. If we can’t afford to buy it all now with cash, but think we can afford the monthly payment, why wait we can charge it? It seems to easy to justify borrowing money to purchase any item we want (or think we need). But ask yourself this: Would I buy this item if it cost three or even four times this price? When you charge it, your answer is “yes!”

Look at this example: You want a new sofa set costing $2,000 because you want your home to be more attractive. You don’t have the cash on hand to buy the furniture outright, but the store offers a special deal: 90 days with no payments due, followed by a low monthly payment of $50.00. It sounds like such a bargain. But wait! The interest on this loan is usually 18-22 percent and that low monthly payment means you’ll be paying off that sofa set for over 20 years! By that time, you’ll have paid about $8,000 in interest on a $2,000 purchase. Take a good look at that price tag. Would you really agree to pay $10,000 for that sofa? If you charge it, your answer is “yes!”

When we charge anything on credit cards—especially consumable items such as restaurant meals, movies, vacations, groceries, clothes, etc.—and then make only the minimum monthly payments required by the credit card company, we are paying three or four times the original price of those purchases. This is why that blizzard of credit cards keeps coming in the mail.

If you have any credit card debt, take a moment right now to make a list of all your credit accounts. For each lender, write down: 1) the interest; rate 2) the monthly finance charge; 3) the minimum payment. Look at how little is going toward the principle. The rest is making the card company rich.

Do you have a long term financial plan? The credit card companies do. Their plan is for you to charge as much as possible as fast as possible and then pay it off as slowly as possible. This way, they take a 300 percent markup on everything you buy.

When you understand why card companies are so eager to extend their friendly credit line, you’ll understand what happens next. Should you suffer a financial setback—due to illness or unemployment—and be forced to make payments late, you’ll soon find out who your friends are. The card companies now start to heap late charges on top of the interest charges on top of the principal. Your debt burden will skyrocket.

Now you understand the true cost of credit and the hidden agenda of the charge card companies. It’s your choice. Do you want to become debt free and have a future of financial freedom?

Help is at hand. Books, seminars and computer programs exist that can help you to get out of debt. Credit counseling programs allow you to talk over debt elimination strategies. But, be cautious about companies that offer this help. Find out who they are, what they cost and what they will actually do for you. Some debt consolidation programs offer only a short term solution that does not solve the real problem.

Take control of your life and future right now.

First step: determine the type of help you need. Are you disciplined enough to learn how to do it on your own? Then head to the library and get the information. Or do you want help from a credit counselor? Then pick up the phone book and start calling credit counseling companies. Ask questions. Evaluate the answers. Show around for a solution that’s right for you. This is one window shopping expedition that won’t cost you anything. In fact, it could save you a fortune for years to come.