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Paying off your credit cards could be first step toward regaining control of your finances
By Betty Lin-Fisher
Beacon Journal business writer
Published on Sunday, Jul 20, 2008
If you're like me, when you read about the $2.57 trillion that American consumers are in debt, it's a staggering number. It's really hard to comprehend.
So consider it this way, which is equally staggering, according to a recently released survey by a group of consumer groups, national nonprofit organizations, leaders and scholars:
• For the first time since the Great Depression and amid historically low unemployment, Americans spent more than they earned in 2005 and 2006.
• Debt payments eat up about 15 percent of the average U.S. family's income. More than 20 percent of lower-income families spend at least 40 percent of their income on debt payments.
• One in seven families is dealing with a debt collector.
• One in seven Americans reports that at some point in their lives, they experienced debt problems serious enough that they filed for bankruptcy or used a credit consolidator.
• More than one-third (36 percent) of Americans say they have felt at some point that their financial situation was out of control. People ages 30 to 49 are more likely than others to have felt this way (45 percent); so are parents of children under age 18 (41 percent) and African-Americans (46 percent).
It's easy to get into debt. Pull out your credit or debit card and swipe. Go to a payday lender if you're out of cash before the next paycheck. Qualify for a loan to pay your debts or consolidate.
But when debt gets out of hand, it can be very dangerous — especially if you aren't disciplined about paying it off in an aggressive manner.
For instance, if you pay only the minimum each month on your credit card, it's mind-boggling the amount of time it will take you to actually pay off that debt — and the interest you will be paying in the end.
Say you have $10,000 in credit-card debt at an 18 percent interest rate and a monthly minimum payment calculated at 2.5 percent of your debt. Paying the minimum of $250 a month will take you 382 months or almost 32 years to pay off that debt. That's assuming you never charge another thing to the card. And you'll be paying more than your original balance with an additional $14,615.49 in interest. So really that $10,000 credit-card debt will be nearly $25,000 by the time you're done.
''I call credit-card debt 'bad debt.' It's a wealth killer,'' said Jay Seaton, president of the Consumer Credit Counseling Service of Northeastern Ohio. ''It's not about pointing fingers at cards. I like them. I use them. I just understand what the value is and what the dangers are.''
When you pay the minimum only, you are paying only a sliver toward the principal of the loan and nearly all of the payment goes toward interest. To get a good handle on that, take a look at your last few credit-card statements, which will show you how your payment is broken down, said Cynthia Sich, director of the Summit County Office of Consumer Affairs.
Too often, people will pay only the minimum because they don't feel they have a big chunk of money to throw at the debt, Seaton said.
''That's being short-sighted. Even $5, $10 or $20 [extra] makes a difference over time,'' he said. ''You don't need to have the $100 or $200 extra. . . . Just don't be thinking that just because I don't have a lot of extra money lying around, I'll just defer. Pay anything and it dents the minimum and you are making progress.
''The quicker you get to zero, the quicker you get to the other side.''
Good, bad debt
There's a difference between good debt and bad debt. Good debt tends to be things that are long-lasting and outlive the payments, said Nancy Hudson, a specialist in money management for the Ohio State University Extension Services.
A mortgage on a house, for instance, would be good debt, since it's a long-term investment. A car might be good or bad debt, depending on whether your loan will outlast your car, Hudson said.
If you take out a loan for education, that's good, while taking out a loan for a vacation and continuing to pay after the vacation is not good, said David Blankenhorn, president of the Institute of American Values, a nonpartisan think tank that looks at family and civil society. The institute has partnered with a number of national consumer organizations, including the Consumer Federation of America, and leaders to launch a national campaign aimed at changing Americans' debt habits and encouraging them to save. (The statistics listed at the beginning of the column were from the organization's study, For a New Thrift: Confronting the Debt Culture.)
Building up credit-card debt for things that have been consumed in the past is like looking at the rear-view mirror, Seaton said.
''You're paying for things you've consumed — clothes that don't fit or food you've already eaten,'' he said.
Blankenhorn's coalition of groups is trying to promote an alternative to debt and to turn debtors into savers. It's about wise use of what you have. A thrift ethic is what Blankenhorn describes as a secular version of stewardship in the religious community.
But Blankenhorn said that while sometimes the thrifty thing to do is save money, other times it might not.
''Sometimes buying the cheapest item of clothing in the store is not a good idea. It's crummy, it will wear out soon and people will look at you and think you don't fit in your environment. Maybe spending is the thrifty thing to do. But on the other hand, buying things you can't afford because you want to keep up with the Joneses is the stupid thing to do,'' he said.
Paying off cards
If you have a few credit cards with outstanding balances, there are schools of thought on which to pay off first. Many advocates will advise paying off the debt with the highest interest rate first. Others suggest paying off the smallest balance.
''Sometimes people just need to get a small debt paid off so they feel successful, even if it's going to cost them more in the long run,'' Hudson said. ''So much about budgeting is behavioral. Of course, the most cost-effective way is to pay the highest interest rate first and pay extra [on the others].''
This week's challenge
Here's this week's challenge: If you've only been paying the minimum on your credit card, pay extra this month and get in the habit — even if it's just a few bucks. Take a look at your habits and figure out what dangerous debt traps you might be getting into.
Betty Lin-Fisher can be reached at 330-996-3724 or blinfisher@thebeaconjournal.com.
If you're like me, when you read about the $2.57 trillion that American consumers are in debt, it's a staggering number. It's really hard to comprehend.
So consider it this way, which is equally staggering, according to a recently released survey by a group of consumer groups, national nonprofit organizations, leaders and scholars:
• For the first time since the Great Depression and amid historically low unemployment, Americans spent more than they earned in 2005 and 2006.
• Debt payments eat up about 15 percent of the average U.S. family's income. More than 20 percent of lower-income families spend at least 40 percent of their income on debt payments.
• One in seven families is dealing with a debt collector.
• One in seven Americans reports that at some point in their lives, they experienced debt problems serious enough that they filed for bankruptcy or used a credit consolidator.
• More than one-third (36 percent) of Americans say they have felt at some point that their financial situation was out of control. People ages 30 to 49 are more likely than others to have felt this way (45 percent); so are parents of children under age 18 (41 percent) and African-Americans (46 percent).
It's easy to get into debt. Pull out your credit or debit card and swipe. Go to a payday lender if you're out of cash before the next paycheck. Qualify for a loan to pay your debts or consolidate.
But when debt gets out of hand, it can be very dangerous — especially if you aren't disciplined about paying it off in an aggressive manner.
For instance, if you pay only the minimum each month on your credit card, it's mind-boggling the amount of time it will take you to actually pay off that debt — and the interest you will be paying in the end.
Say you have $10,000 in credit-card debt at an 18 percent interest rate and a monthly minimum payment calculated at 2.5 percent of your debt. Paying the minimum of $250 a month will take you 382 months or almost 32 years to pay off that debt. That's assuming you never charge another thing to the card. And you'll be paying more than your original balance with an additional $14,615.49 in interest. So really that $10,000 credit-card debt will be nearly $25,000 by the time you're done.
''I call credit-card debt 'bad debt.' It's a wealth killer,'' said Jay Seaton, president of the Consumer Credit Counseling Service of Northeastern Ohio. ''It's not about pointing fingers at cards. I like them. I use them. I just understand what the value is and what the dangers are.''
When you pay the minimum only, you are paying only a sliver toward the principal of the loan and nearly all of the payment goes toward interest. To get a good handle on that, take a look at your last few credit-card statements, which will show you how your payment is broken down, said Cynthia Sich, director of the Summit County Office of Consumer Affairs.
Too often, people will pay only the minimum because they don't feel they have a big chunk of money to throw at the debt, Seaton said.
''That's being short-sighted. Even $5, $10 or $20 [extra] makes a difference over time,'' he said. ''You don't need to have the $100 or $200 extra. . . . Just don't be thinking that just because I don't have a lot of extra money lying around, I'll just defer. Pay anything and it dents the minimum and you are making progress.
''The quicker you get to zero, the quicker you get to the other side.''
Good, bad debt
There's a difference between good debt and bad debt. Good debt tends to be things that are long-lasting and outlive the payments, said Nancy Hudson, a specialist in money management for the Ohio State University Extension Services.
A mortgage on a house, for instance, would be good debt, since it's a long-term investment. A car might be good or bad debt, depending on whether your loan will outlast your car, Hudson said.
If you take out a loan for education, that's good, while taking out a loan for a vacation and continuing to pay after the vacation is not good, said David Blankenhorn, president of the Institute of American Values, a nonpartisan think tank that looks at family and civil society. The institute has partnered with a number of national consumer organizations, including the Consumer Federation of America, and leaders to launch a national campaign aimed at changing Americans' debt habits and encouraging them to save. (The statistics listed at the beginning of the column were from the organization's study, For a New Thrift: Confronting the Debt Culture.)
Building up credit-card debt for things that have been consumed in the past is like looking at the rear-view mirror, Seaton said.
''You're paying for things you've consumed — clothes that don't fit or food you've already eaten,'' he said.
Blankenhorn's coalition of groups is trying to promote an alternative to debt and to turn debtors into savers. It's about wise use of what you have. A thrift ethic is what Blankenhorn describes as a secular version of stewardship in the religious community.
But Blankenhorn said that while sometimes the thrifty thing to do is save money, other times it might not.
''Sometimes buying the cheapest item of clothing in the store is not a good idea. It's crummy, it will wear out soon and people will look at you and think you don't fit in your environment. Maybe spending is the thrifty thing to do. But on the other hand, buying things you can't afford because you want to keep up with the Joneses is the stupid thing to do,'' he said.
Paying off cards
If you have a few credit cards with outstanding balances, there are schools of thought on which to pay off first. Many advocates will advise paying off the debt with the highest interest rate first. Others suggest paying off the smallest balance.
''Sometimes people just need to get a small debt paid off so they feel successful, even if it's going to cost them more in the long run,'' Hudson said. ''So much about budgeting is behavioral. Of course, the most cost-effective way is to pay the highest interest rate first and pay extra [on the others].''
This week's challenge
Here's this week's challenge: If you've only been paying the minimum on your credit card, pay extra this month and get in the habit — even if it's just a few bucks. Take a look at your habits and figure out what dangerous debt traps you might be getting into.
Betty Lin-Fisher can be reached at 330-996-3724 or blinfisher@thebeaconjournal.com.
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