Summary
I thought to share with you this tool I created so you can see how credit cards can work against you if you do not use them wisely. Credit cards, if used inappropriately, can kill you financially. Here are the reasons why:
Here’s why:
- They charge super high interest rates
- They charge a late fee on top of the high interest rates
- They advertise you can pay minimum payments which is the most dangerous marketing device to customers ever!
- They can ruin your credit profile
Resource: CC Repayment
They charge very high interest rates
Many credit cards’ interest rates range from 12% to 22% per year. This is called the APR or Annual Percentage Rate. These rates are very high. Why? When you deposit money in the bank, you get less than 1%. I hope this is very clear. They rip you off.
They charge late fee on top of the high interest rates
Late fee charges range from $10 to $25. End of story. So, not only do they grill you on outstanding balances, they also charge you for being late. If this happens, you should give them a call and tell them to remove the fee. Give them a valid reason (e.g. you are a good client, you were travelling, this only happened once).
They advertise you can pay the minimum payment
See the mind set of banks is that they want good paying customers to keep on paying the minimum payment because that is how they make money – interest. Smaller chunks look affordable. Says the guy who doesn’t understand credit cards: “I can pay $20 forever.” But you have to look at the totality of how much money they are making off of you.
They can ruin your credit profile
Any unpaid amount always causes a negative impact on your credit score. Credit scores are used by other lenders to gauge if you are a trustworthy borrower. A lower credit score (less than 650 – range is 400 to 800) will mean higher interest rates for any future loans and/or harder to get another line of credit.
Using the tool, you can gain insight to how much you are paying on interests, number of years or months to pay back the loan as well as it forces you to create a structure on how to pay off your loans.
CC Repayment Model
- On the Summary Tab, plug in the details of your cards (green shaded cells). Put the Amount, Interest Rate, and Minimum Payment. Put the highest interest bearing card first. Then, on the Spare Cash Each Month Available to Pay Loan, put in either the sum of the minimum amount, or the amount of extra cash you may have to pay off the loan.
- On the Summary Tab, the Analytics portion will show you how much total interest you are paying, total payment, the # of months or years it takes to pay the loans depending on how much you put as payment each month.
- On the Detailed tab, you will see the breakdown of the loans you put in the Summary tab by Beg. Balance, Interest Payment and Ending Balance.
- This models also shows you a good way to pay off your loan. So, for example (Detailed tab), if you have a monthly spare cash (Line 6) of $1,000 each month, the first debt you need to pay is the one with highest interest first. All the $1,000 spare cash will go to that credit card first before you pay the second one with high interest.
- In this case, American Express gets paid first. You will see the green shaded cells that the payment goes from Month 1 to Month 12.
- Citi gets paid second. The payment starts in Month 12 to Month 18.
- Discover gets paid last from Month 18 to Month 21.
Recommendation
- Use credit cards only when you really need them
- Always pay in full at the end of each month
- Never spend more than you earn
- Despite all the cash back or good promos they advertise, just ignore them
- Carry no more than 3 credit cards. They are so hard to maintain if you have more than that