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The Perils of Credit Card Debt

Finances-300x225Credit cards can be a boon or a curse. On the one hand they are convenient and easy to use; they also provide us with reward points and airline miles that can be redeemed for goods and travel. On the other hand, however, a credit card can be a dangerous thing if you don’t use it properly. The interest rates are sky high, often over 25%, and if you don’t take care you can find yourself in a heap of debt. What does that actually look like? Your accountant in Billings, Montana does the math to show you why you want to avoid paying interest on your credit card.

 

 

First, Let’s Rack Up Credit Card Debt

You don’t have to have the cash now to pay for your goods. Instead, just put it on the credit card. Let’s suppose that we have a brand new card with a $5,000 limit. The APR is 19.99%; we will call it 20%.

With your shiny new card you decide to hit the mall and redo your wardrobe. $1,200 later you have all new clothes. Afterward, you head out on the town with your friends to show off that new wardrobe. Again the card comes out, and before you know it, you have spent $500 on drinks and food. The next day you decide that you need some car accessories, new furniture, and again treat everyone to eating out. Before you know it, you have maxed out your new card, and back to cash you go.

When the bill arrives, you see that you only need to pay $150 each month. Not a bad deal and you write a check.

Calculating the Payments

Credit cards have minimum payments that are generally 3% of the balance, or $25; whichever is more. As time goes on your $150 payment keeps dropping, so you keep reducing how much your wardrobe, furniture, and other goodies are costing.

How long do you suppose it will take to pay off that credit card when you pay just the minimums?

The answer is 15 years, 3 months. Long after the clothes fall apart, the furniture is stained and possibly broken, and you can’t even remember the food you ordered, you are still paying on your card.

How much do you suppose you paid back over the years?

Your $5,000 spending spree will cost you, after all of the interest is paid, $10,602. You end up paying more in interest charges than you did on the goods in the first place. Calculate your payments on CreditCards.com.

What happens to many people is that they decide to get another credit card. They then max that one out as well. With promotional rates, such as 0% interest for 12 months, they feel they can easily make the minimums and not have to worry about the interest. But after 12 months, when all of that interest is suddenly tacked onto the card, they are struggling to make even the minimum payments.

A Financially Healthier Alternative

Your accountant in Billings, Montana offers this as an alternative. If you want to have a credit card, you should only charge the necessities, the things you are paying for anyway. This means food, gas, insurance premiums if possible, utilities, and the like. Everything else, you pay in cash. This will keep your credit card bill to a minimum, and you can pay it off at the end of every month. Never carry a balance, never pay interest charges.

If you do have credit card debt, use your tax refund this year to knock it down and save yourself thousands of dollars over the next several years.

Practical Taxes

Practical Taxes is a full service accounting firm in Billings, Montana. If you need an accountant for payroll services, tax preparation, or business consulting, we can meet your needs! Give us a call at 406-894-2050 to find out what we can do for you!