Credit card debt can be very costly. But if you only pay the minimum when you can afford to do more, your past may be to blame.
When you carry a balance on one or more cards from month to month, you end up paying a lot more for billed items as interest accumulates, and clearing that balance may take decades.
But paying off a credit card isn’t always easy. While it’s important to understand how the interest on such debt works against you, managing credit card debt isn’t always about “if you know better, you’ll do better.” For those of us with a history of long-term financial hardship, this is especially true.
My own financial history proves it. While I understand how badly carrying credit card debt can hurt me, I haven’t made a significant effort to pay it off. First, because poverty did not allow it, but later because the old models are just hard to change.
Understanding the real cost of credit card debt can provide an additional incentive to “do better,” but taking action takes means and in some cases sheds years of misguided thinking and emotional attachment to money. Let’s talk about this incentive first.
Understanding the High Cost of Credit Card Debt
If you have about $ 7,000 in credit card debt and make the minimum payment only, it will take over 32 years to pay it off and cost you $ 13,300 in total interest. While $ 7,000 in credit card debt may seem like a lot to those who pay off their balance every month, TUSEN 2021 Credit Card Debt Study found that this is roughly the amount owed on average by people with revolving credit card debt.
The minimum payment is just that: the smallest amount you can pay without having problems with your credit card issuer. Doing more than the minimum – even just a little – can have a major impact on the cost of your debt.
For example, if you receive a $ 2,000 tax refund this year and use it to start a credit card balance, reverting to minimum payments afterwards, you will reduce about four years and $ 4,000. on debt repayment.
If you double the minimum payment each month, it will take about eight and a half years to pay off the balance and cost $ 3,300 in interest, which is $ 10,000 less than the minimum.
Whether you can, formulate a plan to get paid off your credit card debt by paying more than the minimum payments. You will also either have to stop charging more or resolve to pay for new purchases each month on top of your overall debt payment. A combination of budgeting, finding ways to save on expenses, and increase your income with a side gig can be very powerful.
The debt snowball method is an empowering strategy. You are paying off credit balances from smallest to largest, showing rapid signs of progress. However, do not close the cards when you reset the balance. The only thing better than having a reserve of money in your emergency savings is to have that money and to have access to your lines of credit.
Now that we don’t have the math, let’s talk about what might be keeping you from paying off your debt.
Barrier n ° 1: money
Saving all that money on interest assumes you can make more than the minimum payment. And sometimes that’s just not possible. In 2019, 34 million Americans lived in poverty, according to the US Census Bureau. Over the past year, many more have been affected by the pandemic – losing their jobs, reduced hours or heavy medical bills – and the fallout from natural disasters, which can make it difficult to pay bills.
If you can’t pay more than the minimum, pay the minimum and focus on more pressing issues like keeping the lights on. If minimum payments aren’t even possible, contact your credit card company to inquire about hardship programs or consider participating in a debt management program. Don’t be afraid to go bankrupt, which eliminates some truly overwhelming debt so you can make a fresh start.
Barrier n ° 2: your state of mind
Having cash on hand or in an easily accessible savings account may feel better than placing it in debt that seems intangible and still there. After all, what if you have a financial emergency and need the money? The electric company and the owner may not accept credit cards.
This reasoning may stem from years of financial insecurity. It was my attitude to credit card debt for a long time. I wasn’t a money nerd from the start – I grew up in the lower middle class and started as an adult as a single parent in public housing receiving government assistance. What changed? First, I developed the means to pay more than the minimum on my debt, through a combination of hard work, luck and privilege. But it took me a lot longer to mend my relationship with credit.
Living in poverty shapes the way you use and think about money. When money is tight, there are only a limited number of levers under your control, and every choice you make is precarious. For someone living in or even near poverty, a credit card is a luxury and a safety net, a substitute for an emergency cash fund. A few particularly tight months – perhaps due to higher utility bills in a cold snap or unscheduled auto repairs – can result in seemingly insurmountable debt. As the debt grows and your income doesn’t, your prospects seem more and more desperate. Your safety net becomes a prison.
Even once your financial situation begins to change, turning these financial mechanisms and attitudes towards money in a new direction takes considerable time and effort. I was struggling to pay more than the minimum on my debts, but eventually, reluctantly, I did it anyway, because I saw the math and knew it was good for me. I struggled with feelings of dread when paying my bills each month, long after I stopped worrying about the lights going out, because for so long money management was about feelings and extremely negative results.
Assuming readers will see the light and make the best choice just because the math makes sense is shortsighted. It ignores the complex personal history that plays into the financial choices of each individual. So here’s that recognition: Money is more than the paper it’s printed on or the things you can exchange it for. For many of us, money – or more accurately the absence of money – is directly linked to feelings of fear, insecurity and even lack of personal worth.
When you live paycheck to paycheck, you use credit differently than when you live in relative financial comfort. For people in financial insecurity, credit is a substitute for a real emergency fund; for people who have the means, it’s a tool to earn rewards and qualify for better rates on home and auto loans, for example.
Learning how to best manage credit card bills is a good knowledge, no matter what your current situation is. But as your financial situation changes – maybe you learn a new trade or get promoted – work on changing your relationship with money as well. This change could be fraught with pitfalls and it could take years. But working on a healthy credit relationship pays off in more ways than one.