Credit cards are the devil! If you have a credit card debt you will understand this statement very well. Here is why I say this.
- It’s easy to sign up for one. Get a free T shirt, toaster or other knick knack.
- Spend now and collect those rewards points, air miles, hotel points, cash back bucks or whatever
- This is all sounds great. It is just the thing to get suckers to sign up. One little piece of plastic in the purse or wallet. What could go wrong? Just get a couple more for fun to add to the collection.
Here is where the problems start
- It’s too easy to spend with them. A swipe here and a swipe there. Off you go. Make sure to swipe as many times as possible to get those reward points.
- The thing is that it’s hard to spend cash money. Your brain knows that $50, 50 Euro or 50 Pounds is real money. You hold onto it with tight fists. No one wants to break that big bill. It feels good in the hand! So you don’t waste it like a bunch of chump change. But spending $50 with a credit card is easy. Just a little swipe of the card and voila another trinket, drink out or meal. What fun!
- The spending was so was so easy. So let’s do some easy online shopping.
That is until the monthly bill arrives.
Oh crap. It’s $1200! What the heck did I do? It was so easy to spend. It would have been much harder to spend $1200 in cash for sure. To see that cash money leaving your hand is hard. Real hard.
Now that you have an $1200 bill you need to pay it off in full. But not everyone can. So they carry a balance forward. Now you are paying 19.8% interest on that crap you bought. Plus then you buy more stuff with card for your convenience. So now you are paying 19.8% on the stuff you just bought as you carry a balance.
Where it gets worse is that many people have more than one card. And they carry a balance on more than one card. Pretty soon they can’t keep track of what they owe. They dread the bills coming in but only pay off the minimum as the balance gets bigger. Ouch.
Banks purposely set the minimum payment so low that you pay as much interest as possible. Many poor slobs pay 50% interest and principal each month on some stupid junk they should not have bought in the first place.
How much interest are you really paying? More than you think!
Let’s look at the amount of interest Charlie Chump would pay on a credit card debt of $20,0000 at an interest rate of 19.8% if he took this many years to pay off the debt. The faster the better. Look at how the interest builds up.
- 1 year: $2209
- 2 years: $4383
- 3 years: $6684
- 5 years: $11,659
These are crazy amounts of interest to pay for buying something you probably didn’t need in the first place.
Here you can download the model
Use the model your cards to determine how you are paying in interest per year and how much you could save by paying it down sooner.
How do you fight this devil?
- First of all start buying things in cash and with debit card. It’s hard to buy with cash as you can’t buy with money you don’t have!
- Make an inventory of all the credit cards you have and the interest they carry
- Start to pay them off one at time with my focus method. Pay the highest rate card first.
- If it helps pay the lowest balance card first to get that off your books.
- Consider transferring the balance to a lower rate card. See my article on paying off credit card debt.
A better way. FIRE method
- Pay with cash or debit card to make it hard to spend. If you can’t afford it you don’t need it.
- Cancel all your cards except one or two that you pay off each month if you use them for hotels and online
- Forget rewards cards and points. Those just make you spend more on junk you don’t need. Only use these if you pay off the balance each month in full.
- Free yourself from this hellish debtors prison and never go there again.
Banks are scammers!
They borrow money from the Federal Reserve or European central bank at 1% and lend it to you at 19.8%. That’s an 18.8% margin. Greedy! Sure there is some credit risk but not that much.
They purposely lure dumb college students to get used to using cards so they collect a 2% transaction fee from each merchant. They want more than the 2% fee though. They want you to take that loan 19.8% APR. That’s usury baby!
Banks purposely set the minimum payment so low that you pay as much interest as possible. Many poor slobs pay 50% interest and 50% principal each month on some stupid junk they should not have bought in the first place.
You know this business is hugely profitable. Look at how many credit card ads are on TV. It’s like a third of the ads on TV. Any idea how much that costs? A ton. Yes, you are paying for those stupid ads with the monthly interest you pay.