Credit card companies are in business to make money. Make no mistake about that. And if you are not smart about your credit card debt, you can end up making them 18 percent on their investment at about a $1,500 per year cost to you. Whether you enrich the credit card companies or save the money yourself is up to you.
And if you turn around and invest just the savings on your credit card interest, it can amount to a pretty nice tiny nest egg for the future.
If your card charges 18 percent interest, and you owe $5,000, your credit card company might want you to make a minimum payment of $150 a month. Even if you don’t buy anything else, it will take nearly four years to pay off the $5,000, and you’ll end up paying $2,000 on top of it interest charges. That can turn into a massive chunk of money over the years.
By 2007, Americans carried an average of $6,600 of credit card debt, according to CardTrak.com. Millions of consumers regularly carry much more than that. And that’s just credit card debt, often the most pricey kind. Typically, the nominal interest rate on a home equity loan or mortgage is less than half that of credit card rates.
If all that debt represents a liability, it also represents enormous opportunity. Getting rid of credit card debt is the equivalent of earning an extra 18 percent. It makes sense to start reducing debt as soon as possible. Chase offers some of the ideal balance transfer options.
The ideal way suggested is to select the card with the highest interest rate and reduce the principle on that card first. Other steps in a realistic plan to reduce credit card debt would include creating a cash flow budget, avoiding new debts and reducing spending overall.
Then, after you’ve reduced your debt down to levels that’ll grant you pay your monthly balance in full, do it. If you don’t carry a balance from month to month, you are essentially using the credit card company’s money as an interest-free loan.
Credit card companies want “revolvers”, people who carry a balance from month to month and, thus, pay interest each month. “Transactors”, as they are called, pay off their balance each month and card companies put up with them in hopes that they will eventually becoming revolvers.
By becoming a transactor, rather than a revolver, you can save, and even make, lots of money. If you save $1,500 a year in credit card interest, it can add up to $45,000 in interest savings over 30 years. If you invested $100 a month out of your interest savings in a mutual fund earning 9 percent, it could add up to roughly $184,000 in 30 years.
Whether you opt for the investment or just the savings, it is still quite a sum. Over a lifetime, a tiny common sense about credit card debt and a little simple math can pay great dividends.