As Christmas nears, most of us are shopping for the perfect gift for friends and family. The perfect gift, however, sometimes costs more than we can afford.
At Christmas time, it’s perfectly acceptable to get extravagant and spend more than we make. Many of us justify the debt we rack up on our credit cards by saying we’ll pay it off later. Besides, we really only have to pay the minimum payment, right? And that’s a payment most of us can handle. But what most people don’t think about is just how much that gift is really costing them in the long run.
What is the Minimum Payment?
Each month, when you receive your statement in the mail, there are various numbers to look for. If you paid your previous month’s bill in full and there is no interest carried over, then your minimum payment will be $10. If there is interest carried over, your minimum payment will be the total calculated interest (your interest rate, multiplied by 365, divided by the number of days in the billed month) plus the $10.
The Flat Screen TV Example
Take this situation, for example. I decide to buy my partner a flat screen TV for Christmas. I can justify my purchase because the TV is currently deeply discounted. If I buy it later, it will cost me an additional $150. I could put it on a credit card offered by the retail store, but their interest rate is 29.99% – a little too steep for me. So I put it on my regular credit card instead, thinking that I’ll pay it off over the course of a year. After all, my credit card’s interest rate is 19.99% – 10% lower than the retail store’s rate.
The TV, with taxes included, costs me $500. I pay for it and go home, impressed with my awesome find. At the end of the month, my statement arrives in the mail. Since there was no debt on my card beforehand, I am only expected to pay $10 by the given date, which I do.
The following month, the minimum payment is a little higher at $18.05. That’s like 5 fancy coffees at Starbucks. No big deal. I got this. I pay the $18.05, sit back and enjoy my TV. At $17.89, my bill in the following month is even less. Nice; I like this. I make the payment and wait for the bill to arrive in the following month.
Are you seeing what I’m seeing? If each month I only pay $10 plus the interest, I’m really not paying that debt off very quickly. In fact, at this rate it will take me 9 years to pay off the TV. On top of that, by the time it’s all said and done, I’ll have paid an additional $583 in interest, making the total cost of the TV $1,083. Not much of a savings, when you think about it.
Tips to Avoid Credit Card Debt
- Put the cards away. Pay with cash so you can see just how much you’re spending. This also means that you’re only buying what you can really afford.
- Curb your spending. Make a list. If it’s not on the list, don’t buy it. This should help you control impulse buying.
- Think twice before you swipe. Do you really need that item, or do you just want it? Here’s what I do. If I see something I really want, I evaluate why I want it, then I walk away. If I’m still thinking about that item an hour later, then I can go back and look at it again. If I’ve forgotten about it, it likely wasn’t important. Nine times out of ten I completely forget about the item.
- Come up with a plan. Avoiding debt is so much easier with a plan. Make sure that everything you put on your card you can pay off in full by the end of the month. If you wont be able to pay it off, and it’s a purchase you really need to make, consider using a line of credit, which will come with a much lower interest rate.
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