Credit Card Debt

When we talk about debt, the most common cause of people's financial worries comes in the form of credit card debt. Credit card companies target potential consumers as soon as they're eligible, in the form of college students. This demographic is especially susceptible to falling into debt because they're often inexperienced when it comes to dealing with personal finances. In addition, the temptation of financial freedom can prove too large a lure to overcome.

The credit card companies' tactics appear to be working. Today, over three quarters of college students own a credit card, while one third carry four or more cards. In addition, 10 percent of college students carried a balance of over $7,000, and another 14 percent owed between $3,000 and $7,000.

While credit cards are not bad in theory -- they can actually serve a helpful purpose -- they are more often than not misused. Using a credit card for emergency purposes can be a lifesaver, but instead of charging plastic only in extreme circumstances, people usually use them on items such as food, clothing, and entertainment. Spending of this type does not increase the spender's equity; in other words, they're not buying items that contribute to their net worth.

Credit cards' biggest drawback is the high interest rate. When you buy an item with a credit card, you do not think about the expenses associated with the interest. For instance, when paying for a $100 dinner, you think -- $100 won't be a problem to repay. But in reality, by the time that $100 meal is paid off, it will end up costing $200. And coupled with the fact that there are usually many more charges on the balance, it's simply a tough debt to repay.

Now let us discuss the minimum payment quandary. We've all heard that paying only the minimum payment on a credit card bill can make the repayment of a balance take decades. Well, what you heard was true. Let's say that you had a $1,300 balance on your card with 18% interest. Each month, you'll pay roughly $20 only in interest. At the same, your minimum payment will be along the lines of $20-$30 - only slightly higher than the interest charge. So let's say you make a payment of $25 and your interest was $20 -- that means you only paid $5 of the balance. If your balance is $1,300, it means that it would take you 260 months, or 13 years to repay your bill.

That doesn't sound like intelligent financial budgeting to me.

Go back to Debt Help