Let’s talk about credit card debt and interest rates. For some of you, this is going to seem obvious for others this might be shocking news. Financial savviness is a learned behavior it’s not inherent. Some of you may take this knowledge for granted. I used to include myself in that group until I spoke with friends who were up to their eyeballs in credit card debt. I realized how incredibly lucky I was to have a family I could go to with all of my financial questions.
I grew up with parents and grandparents who unknowingly to myself at the time were teaching me how to manage money and debt from a very young age. Besides working for my father on construction sites when I was little, I got my first job at a coffee shop the week before I turned 16. I felt so independent when I was able to open my first bank account to deposit my paychecks. I quickly learned, however, the quiet tricks of a bank. I spent a couple of dollars more than I had available on my debit card and received an overdraft fee of around $30. I was in shock that a bank would allow me to take out more money than I had available. This lesson has stayed with me my entire life. I knew that I never wanted to pay a bank a penalty fee when it came to something I had control over.
I’ve had several friends who didn’t know that the hundreds they were paying down on their credit card debt were mainly going to pay off the interest. With banks only asking you to pay off the minimum you may be under the impression that they have calculated some payment plan for you to pay it back. Unfortunately, oftentimes the minimum doesn’t even cover the full amount of the interest. It’s up to you, to figure out the percentage of interest you’re paying on the amount of debt that you have and determine your minimum and a realistic date you can pay that back by. If you don’t have your interest calculated and a goal set in place it can be difficult to motivate yourself to repay your credit card debt.
Here’s a real-life scenario of the issue:
Let’s say you have the Discover it Cash Back card. This card has a $0 annual fee, which is great, I have yet to see a reason to pay an annual fee on a credit card. This card also has a variable APR (Annual Percentage Rate) of 13.49% – 24.49%. This means that the interest you’re paying on this card could change annually. If you have a bad credit score already you could be paying at the higher end of the interest that’s due.
Okay so you have $8,000 in debt on this one card, they gave you a nice big spending limit and you have almost maxed it out. This also raises your percentage of credit card usage (how much credit you’re using compared to your total limits) which has a high impact on determining your credit score. So you must first make the minimum payment on this card. If you recently opened a card with terms such as 0% interest for 15 months as soon as you miss a minimum payment your terms are canceled and interest kicks in. If you’re already paying interest, missing a minimum will ruin your credit score and cost you significantly. To explore your options after missing a minimum credit card payment check out this article by Credit Karma to get back on track.
At this point, your minimum payment is most likely completely comprised of your interest or only a small chunk of your interest. so you want to pay over the minimum payment. However, if you’re paying an interest rate at 13.49% on $8,000 in debt, you’re paying the bank $1,079.20 a year or $89.93 a month. Now let’s say you have an interest rate at 24.49% on $8,000 in debt. You’re now paying the bank $1,959.20 a year and $163.27 a month. Since interest is calculated daily, the sooner you can pay off the balance the more you save.
This all makes it nearly impossible for a lot of people to pay off their credit card debt unless you’re able to pay a significant amount of your monthly paycheck down on this. If you’re in this situation there are still options to dig your way out of the hole.
One option and a very privileged one is to reach out to family members who may be able to lend you money to take away the burden of paying off the interest. In this case, you would have a personal loan and pay off your debt with a payment plan worked out by you and your family members. Only take this option if you can make good on paying back your debt and are steadily employed. Be realistic and remember that you could ruin your relationship forever if you are unable to stick to the terms of your agreement.
Another option would be to reach out to your bank and look at options for refinancing your credit card debt and moving it to a loan with a lower interest rate. Additionally, if you’re truly serious about paying off your debt you could transfer the debt to a new credit card that offers a 0% interest for a certain amount of months, some even go as long as 18 months. If you truly have a spending problem I’m hesitant to recommend opening a new card, this will also be difficult with a bad credit score. No matter what, talk to your bank about possible options and speak with a close friend or family member who may be able to help you manage.
In addition to paying off your debt start putting away a small percentage of your paycheck towards savings. If you’re without an emergency fund this could hinder all of your good progress by putting you further into debt in the future. This is also a good step in ending the toxic cycle of living day to day, never preparing for the future.
Something that will happen as you begin to pay off large amounts of debt is that your credit score will drop because of your debts effect on credit utilization. DO NOT WAIT to pay off credit cards for a few measly credit score points. Though paying off your debt in the short term may affect your score negatively in the long term you’re setting yourself up to maintain a much larger score and pay less on interest. In this case, I’m going to put on record to ignore your credit score!
I have never spent more money on credit cards than I had in the bank. I treat it like a debit card with perks! I live the exact life that my circumstances have allowed me to live. This means sometimes I get to have a fancy gym membership and send my laundry out and sometimes I’m washing my clothes in a tub and running around the block. I have never been too proud to ask for help or live the way I needed to live to get by until something else came along. Sit back and have an honest conversation with yourself and ask if you’re living the life that your paycheck will allow for. If you continue to take vacations, eat and drink out on the town, buy clothes and stuff that’s not essential to your staying alive then you’re living above your means. No matter how you try to argue it, you will never convince me otherwise.
I know that all of the things I’m saying here come from a place of privilege based on the way I was raised. My dad owned his own business that my mom managed. On top of managing my dad’s company, my mom worked part-time for years at another job until she went full time when I was 18. I’m incredibly lucky to have watched two hard-working parents manage money and our household.
To learn more about what a Variable APR is, check out this article from U.S. News & World Report which breaks down every aspect.
To concur your finanical goals head over to, How To Create a Budget.