Never Carry a Credit Card Balance
In 2005, the total consumer credit
amount totaled $2.2 trillion. The average
household consumer debt is $9,000. If we
exclude those households paying their bills
in full each month, household consumer
debt actually is closer to $13,000. Three
out of five Americans carry credit card
debt from month to month. The average
household spent $1,700 per year on
finance charges and late fees last year.
Nearly half the people who carry a credit
card balance pay only the interest on their
balance each month (How much debt can
we, 2005). Here’s a sobering example of
how credit card debt can undermine a
family’s financial viability:
Save, Save, SaveLooking back at the story of the $2,000
sofa, consider this. If the family had put
the same monthly payments into a simple
10% mutual fund over the same period of
31 years, their fund would have yielded
$45,540. But because they had to have that
sofaright away, they paid dearly for it.
One of the most important aspects of a
budget is a savings account. Most financial
planners recommend a family put the
equivalent of 3 to 6 months of the regular
salary into savings. Then, if the
refrigerator breaks down, or the car quits,
the family has an emergency reserve.
Families without an emergency reserve
often fall prey to “payday loan” businesses.
Like credit cards, these enterprises promise
convenience and immediacy. Let’s examine
what they have to offer:Chapter 10
A family needs a new sofa, but can’t
afford to buy one. When they find
one they really like, the husband
pulls out a credit card. Like magic,
they have a new sofa.
They pay $2,000 for the sofa,
using a credit card with an APR of
19.8% interest. If they pay only the
minimum monthly payments, they
will pay off their sofa in 31 years and
2 months.Worse yet, they will end up
paying more than $10,000 for their
$2,000 sofa. The interest alone robs
them of $8,202. Can a sofa actually be
worth paying 5 times its original
value?Let’s say you need to borrow $100.
A payday loan business lets you
write a personal check for $115.
The check casher or payday lender
agrees to hold the check until your
next payday or up to 14 days and
gives you $100. At the designated
time, depending on the particular
plan, the lender deposits the check.
You now must have the $115 in
your checking account or you
rollover the check by paying a