Pay Cash, Please

Are you making a minimum payment on a credit card? If the answer is yes, then you should probably be paying cash. Otherwise, you could get stuck with a ballooning debt that will take years to pay off, not to mention a tremendous amount of energy that you could be putting into something you love.

The proud, the few: Establishing good credit.
If you are not making minimum payments, incurring finance charges, or paying late fees maybe you’re in shape to use your credit card responsibly. That is, if you are not doing those things. For instance, you might use it to pay for groceries, gas, or other weekly expenses that you know you can pay off in full. And you are in the habit of paying off that bill, in full, month after month. This is a good way to build excellent credit.

The catch: What you actually get.
But beware. If you are tempted to buy something that you don’t have quite the cash flow for at the moment, even after years of good habits, be very wary. As someone recently said, treat your credit card like a loaded gun. It is very, very dangerous.

Once you take on a debt, it will balloon. Credit card companies now routinely hike your APR once you miss a payment or two. You thought it was 17.24 percent. Gee whiz, look at that, now it’s 24.99 percent. When did that happen? Take a look at all that fine print on the back of your credit card statement. If you are forgetful, or not that devoted to your personal finances, you may find that you are regularly paying $39 late fees. That’s $39 for nothing.

You will not be getting satellite TV with 200 channels and Tivo thrown in. You will be getting nothing. Less than zero. Let’s look at one less-than-zero scenario, but first a little math.

Calculating your monthly finance charge.
Once you get into a substantial balance, say $2000, and an APR, like, say 17.24% things start looking like a landslide. And you, my friend, are standing at the bottom of the hill, not the top. (To calculate your monthly finance charge, simply multiply your balance by your APR. In this case, $2000 x .1724 = 344.28. Then divide by 12 to get your monthly charge: $344.29/12 = $28.73.)

So with that balance and that APR you’ll be paying $28.73 a month just to have the card. Plus whatever you spend. If you get careless and make impulse buys or forget to pay the card, bing, add another $39. So that would be $67.73 for being careless. When it comes to credit cards, ignorance is deadly.

An all-too-common scenario – crunching some numbers.
Your debt is bigger now. You’ve spent a little money. Little things. You’re surprised when you look at your statement. Oh, I was in the Starbucks on the Santa Monica Promenade wasn’t I? Geez, $8?

Now your balance is $2500. Not a titanic amount of money. You can pay it off, you reason. The problem is, credit cards are not reasonable. Let’s look at the math. Now your monthly interest is $35.91. So even if you’ve put the card away for a three months, realizing you have entered dangerous financial territory, you would add $107.75 to your balance. New balance: $2607.75.

New interest payment: $37.46. Three more months of spending nothing, nothing, now ding you $112.39. New balance: $2720.14. For nothing. Now, ask yourself this. How often do you spend nothing on your credit card? If the answer is “Not that often,” you should be paying cash.

These days we are busy people. Six months, in my experience, can slip by in a flash. Granted this is six months without making any payments – but it is also six months without putting any purchases on the card. And this scenario assumes that your interest rate stays at 17.24%. Ha ha. You got such a good initial offer on the APR, didn’t you? But you are human. And you slipped. You need to be paying cash.

Your weakening dollar.

Another interesting thing happens when your debt starts to snowball. The dollars you pay toward your debt aren’t worth as much as they used to be. Because before you can even start paying for the lattes you are buying, you’ve got to pay your interest. So, in the sad story outlined above, say you have $100 that you spent. You have to pay $137.46 to pay it off. That’s the $100 plus the interest accruing in your account.

Given that, your dollar is worth about 73 cents. And in credit card land that’s pretty good going. Would you walk into a store where you got 73 cents on the dollar? I would not. Would you like to pay cash?

Think back to that latte you bought. If it was $2.50, your real cost is $3.43. Would you have paid that? How about that just out of reach purchase? Say you paid $1500 for a flat screen TV, knowing that your paycheck was right around the corner. Would you have bought it for $2055? Because that’s your real cost in our scenario.

Avoid this ugly outcome.
Count yourself as lucky if this sounds like a nightmare, and nothing more. If it sounds even remotely like something that could happen to you, then please, take care. The upside of this gloomy picture is that you can turn this around. You can take control of your finances. But you need to realize the enormity of what you are up against. That will fuel your determination.

Getting your life back.
When you start to chip away at those balances it can be very rewarding. You get a taste of freedom, lungs full of fresh air on a clear day. You can beat this. But it’s going to take grit. But the satisfaction is nothing short of getting your life back.

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2 Responses to “Pay Cash, Please”

  1. Cash or Credit — Cautionary Thoughts « finance psychology Says:

    […] or Credit — Cautionary Thoughts Here’s a cautionary rant I wrote for a get-paid-for-posting site. Perhaps what’s cautionary is I wrote it in quite a […]

  2. finance psychology Says:

    […] written page after having run some numbers regarding our credit cards. It could potentially take a very long […]

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