How Easily Debt Grows

Dec 8, 2015 by

debt burdenMany of us can’t resist the temptation to live just a little bit ‘higher on the hog’ than our income alone would allow by whipping out the trusty credit card. You know the rationalization drill:

“I’ve had a tough week. I deserve this new jacket.”

“I’m exhausted. Let’s go for pizza.”

“All my friends are going. I should be able to go too!”

“It’s Christmas. It’s okay to splurge a little.”

What’s your favorite rationalization?

Borrowing Just a Little Adds Up Quickly

Let’s say I’m a chronic rationalizer about spending. On average, I use my credit card to live about $100 month ‘richer’ than I really am. What’s the damage after 5 years? A picture is worth 1,000 words:

growth of credit card debt

Let’s see, I overspent during those five fun years by $6,000. That’s not too bad, only $1,200 per year. But I’ve ended up the half-decade another $10,000+ in debt because of that overspending. Huh? How’d that happen??

Time to face the music: I only thought I was overspending by $100 per month. As it turns out, that off-budget fun has so far cost me about $173 per month (over $10,000)—and growing. Where did the extra $73 per month come from? Oh—that’s my credit card company’s little fee, also known as interest, for helping me enjoy myself.

And these numbers are for a credit card account with a 19.99% APR, my actual rate. That’s pretty low in the lucrative credit card biz!

How Long, and How Much, to Pay Off My $10,000 Credit Car Debt?

Okay, I decide to reform. I adopt a budget and stick to it, build an emergency fund, and cut my spending enough to allow me to pay $200 a month toward my $10,000 credit card debt.

Question: How long until I repay the $10,000?

Answer: 109 months, or nearly a decade. Yikes.

Question: How much cash will I send the credit card company at $200 per month before my $10,000 debt is gone?

Answer: $21,660. Double yikes.

The five years of fun I was having by spending $100 a month I didn’t have did not cost me $6,000 (how much I overspent). And it didn’t cost me $10,000 (the debt I accumulated during those five years). It cost me $21,660 when all is said and done. Before I’m able to pay off the debt, I’ll have paid nearly twice as much in interest to the credit card company—$11,660—than I paid for the $6,000 worth of fun I bought!

Makes you want to start a credit card company, doesn’t it?

The Real Cost of Credit Card Purchases

If you are tempted to use your credit card to overspend, just think of it this way: Imagine you’re paying triple the cost of that thing or experience you’re thinking of buying but can’t afford to pay cash for, because that’s about what you may pay in the end.

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