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Quicksand
Debt's impact on budgeting
by Susan Powell
Do you ever find yourself quietly pondering where it is exactly
your money goes? Or, do you find yourself constantly struggling to save money
and get ahead in spite of perfecting your budget and cutting back on spending?
If you're struggling with money and credit cards are a part of your spending
strategy, it's time to look at how your debt-load could be crippling your
efforts to budget and save.
Think of these simple costs to use a credit card:
Balance
Interest
Cost
$2000
10%
$200/year
$5000
10%
$500/year
$10,000
10%
$1,000/year
$20,000
10%
$2,000/year
Typical interest rates range from 8% too 14.9%, with penalty increases that can
send your APR into the 23-26% range. Let's double the interest rate to look at
how a higher interest rate affects your debt-load:
Balance
Interest
Cost
$2000
20%
$400/year
$5000
20%
$1000/year
$10,000
20%
$2,000/year
$20,000
20%
$4,000/year
Being in debt can cost thousands of dollars a year. Factor in Multiple credit
cards and you can see how the cost of being in
debt can keep you in debt. It's a maddening cycle and one many don't understand
until too late.
With the cost of being in debt so high, it's important to understand how credit
cards work. Many people do not comprehend
the impact of interest until they're swimming in it. The amount of interest you
pay every month is based on your balance. The
higher the balance, the more you pay in interest. Interest is added to your
balance, which drives up the number that determines your interest payment for
the next month. Add on penalty fees, and you can see how interest and penalties
perpetuate your
debt-load.
Let's talk minimum payments for a moment. If you're carrying a significant
balance and paying a higher interest rate, you've
probably seen your minimum payments double or triple from where they once were.
Making the minimum prolongs the life and size of your debt-load because this
small payment does little to decrease your balance and subsequently, the size of
your interest payments every month.
Minimum payments alone can cost you hundreds, thousands of dollars a month. It's
the unpredictable and expensive minimum payments that can quickly deplete your
extra money, crippling your efforts at budgeting and saving. Additionally, when
minimum payments are on the high end, it becomes difficult to pay more than the
bare minimum, which increases the difficulty to aggressively reduce your balance
and further prolonging the life and size of your debt-load. When it comes to
your money, don't overlook how your credit cards could be hindering your efforts
to budget and save. The credit trap can be like stepping in quicksand: Easy to
sink, hard to get a grasp and difficult to get out. This year, look at
decreasing your credit card balances when you're perfecting the budget and maybe
your next budget will allow you to save and get ahead once and for all!
Addressing issues of predatory lending, Susan
Powell is a debt prevention/financial literacy expert and author of the new
book, "Credit Card Debt: It Can Cost You Your Life". She frequently writes and
speaks on the subject. Visit her online and follow her newly launched webBLOG at
www.DontDoDebt.com
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