How Debt Kills

Aug 20, 2015 by

Debt burdenLet’s talk numbers for a minute. I don’t mean quantum mechanics—just arithmetic. Stick with me on this, numbers are kinda important if you want to make better money choices™.

Plasma Television Sale

Consider this:

→ You have a credit card account with a 16% APR. (Not too shabby for a credit card! You must understand how to optimize your credit score.)

→ You see that super duper $2,000 plasma TV you think will change your life on sale for $1,700—15% off! Since you don’t have $1,700 saved (outside your emergency fund—congrats on recognizing television purchases aren’t an emergency), you charge the television on your 16% credit card.

→ Your cash flow is already tight, so you pay off the television at $50 per month.

QUESTION: How much did your television cost? (Hint: not $1,700.)

ANSWER: $2,279.83

Not counting sales tax, which you also financed at 16%.

The Carnage of Credit Card Debt

Here’s a brief accounting of the financial damage caused by that 15% plasma TV discount you found irresistible:

  • You paid your credit card company $579.83 in interest on the $1,700 you borrowed from it. In return, you got nothing except your plasma TV itch scratched a bit sooner than if you’d saved up the cash to pay for it.
  • Nearly four years passed before you fully repaid your television debt, draining $50 per month from your budget along the way.
  • Your credit score took a hit because your credit utilization went up. That caused your APR to tick up not just on the credit card you used to buy the TV but on your other credit card account too. (They’re all watching your every money move, you know) Those higher APRs could cost you hundreds if not thousands of dollars in extra interest expense in the future.
  • Turns out that, because of something called hedonic adaptation, that plasma TV didn’t change your life much after all. And your buddy got an even bigger TV; the guys are watching the Super Bowl at his place.

How Debt Kills

The bottom line is that, instead of scoring a 15% discount on that awesome television, you paid a 29% premium. If you’re going through life paying 20-30% more than the regular price for everything you buy, hell yes your budget’s going to be tight. Debt would be killing your capacity to save and get ahead.

What to do differently?

  • Save until you have the cash to buy something you want. Chances are by the time you’ve saved enough, you won’t want it anymore.
  • If debt from a history of bad choices is draining your budget, make an appointment with a credit counselor at a non-profit agency affiliated with the National Foundation for Credit Counseling. Or, use my do-it-yourself system to pay off your debt as fast as possible and with the least cash.

Is debt killing your dreams?

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  • Kurt – totally love your points here. Credit utilization is HUGE. I was an analyst for awhile and we focused heavily on utilization rate when determining whether to cut someone’s credit lines or not. Also for credit counseling – I worked with many of these agencies (as an analyst and in my personal life) and I will completely vouch for them (assuming they’re credible). If you’re really working to get out of debt – these are the types of companies that can truly help you.

    One thing I’d add, and this goes along with buying something you really want, but before making a big purchase – walk away. Get out of the store, go home, and sleep on it. The next day ask yourself “does this add to my quality of life”. If it does – shop around and try to find it cheaper. Shop shop shop until you can’t find any way of getting it any cheaper (even look to go used or an older model perhaps). After all of that, if you’ve still decided you want it AND it adds to your quality of life, buy it with cash and don’t look back.

    Great post! I love the way you spun debt as carnage!! It really is!

    • Thanks Chris for the excellent added point and for visiting Money Counselor. Please stop back anytime! 🙂

  • Nice, real world example. Someone can be told a million times over that incurring credit card debt is bad. Illustrating how devastating it can be (hopefully) puts it in more understandable terms that folks can relate to…

    • Yes, I think many people are in denial about the numbers when they borrow using a credit card. Or, in some cases, probably just another example of the poor state of basic personal finance education in the USA!

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