The costs of IRRESPONSIBLE Credit Card use
The number one thing I want for people to understand is how expensive credit cards are. Here is a time-lapse of something that is a very common occurrence every year across the U.S.
Your laptop breaks and despite having a smartphone, you actually kind of need laptops to do work, so you decide to buy one. Most young adults don’t have $1,000 just lying around, so that’s kind of an issue. However, you remember that just last week, you received this awesome-looking credit card pre-approval from Friendly Bank, so the timing is perfect. As soon as you got the pre-approval, you went online, filled out the application in 5 mins, didn’t read any of the disclosures and now 7 days later you have a brand new shiny piece of plastic with $5k spending limit!! Next steps are amazon.com and macbook pro in the search box.
However, what happens after you have entered your credit card info on Amazon could either be a source of great anguish or successful financial future. It seems absurd to think about it, but something as trivial as buying a laptop, if handled poorly, could result in you being unable to buy a car, rent an apartment or even get a job. Here is the anatomy of a potential disaster.
After you buy the laptop, you have $1,000 that you now owe the bank. The premise of this anecdote is that you didn’t have $1,000 lying around, so unless you get a sudden windfall, or your parents bail you out, or you pull extra shifts at your job, you are unlikely to have it next month either.
Next month, you will get your credit card bill. It will conveniently state that you owe $1,000, but you only have to pay $30. Why the hell not? You will make $30 and they basically you can have the macbook pro for as little as five bar beers plus $1 tip per month. You can cut off 5 beers easily. No brainer.
Well, actually it is quite a brainer. Let’s see what happens, when you input $1,000, at 17% APR paying only $30 per month at Credit Card Payment - Should you pay more than the minimum?
It will take you 46 months – 4 years to pay off your laptop and your $1,000 laptop will cost you $1,363!! Pause for a minute and understand this. You are paying 36% over what the laptop cost by putting it on a credit card and making minimum payments only. Thirty-six percent.
And that’s really a best case scenario when you buy something you can’t afford. What if your car breaks down and you out that on the credit card, too? $500 on the credit card. And that trip for Senior Week? I mean you are only a senior in college once, you OWE it to yourself to go on that trip. You have worked hard for four years, so you need one last hurrah. $700 on the credit card. Next thing you know, your $5k limit is maxed out, you are making $150 monthly payments and by the time you are done, you would have paid the bank a staggering $3,942 in interest over TWELVE YEARS. That’s right, your car emergency, your laptop emergency, and your vacation to relief the stress from all these emergencies cost you 7.6% of the median U.S. family annual income (Five Years Of Recovery Haven’t Boosted The Median Household Income | FiveThirtyEight) and it took you 12 years to pay it off. You will probably have kids when you make the last payment on that vacation.
You are probably thinking, “Ok, so I pay a lot in interest. I get it, but what if everything else is ok? You said that I could not get an apartment because of this, or even a job. I don’t see it.”
Well, what happens if you cannot make the payments? Your score will get trashed. The bank will report to the three credit bureaus that you are not making timely payments, and your credit score will be hit. It only takes one 30 day or 60 day delay to wreck your score. According to Credit.com, “On the other hand, according to a study conducted by FICO on credit scoring impacts, a recent late payment can cause as much as a 90-110 point drop on a FICO score of 780 or higher.” How Much Will One Late Payment Hurt Your Credit Scores?
Given that the average FICO score as of October 2012 was 689, let’s say that drops by 50 or 7.5% hit to your credit score from only one late payment!! Many landlords pull credit reports as part of the application review process. If there are two interested parties and Average Joe has a FICO score of 689 and you have FICO score of 639, because you missed a credit card payment, who do you think the landlord chooses? In addition, many companies, especially in finance, have minimum scores requirement for new employees, since they want to see you being able to handle your own finances before they entrust you with other people’s lives. We are talking scary consequences for one bad decision.
So, please please please - think through this decision tree before you put anything on your credit card. The best rule I can give you is that if you don’t have the cash in the bank, you shouldn’t buy the product. But that’s not real life. Emergencies happen, especially to people who can least afford them, it seems. However, borrowing money from a credit card company should be a final resort. Something akin to borrowing from a loan shark, but instead of wrecking your knees the bank will wreck your life. And I don’t think I am being dramatic. Your life could turn into shambles from irresponsible credit card use. Use wisely and NEVER EVER EVER borrow on a credit card to support a lifestyle.
Your laptop breaks and despite having a smartphone, you actually kind of need laptops to do work, so you decide to buy one. Most young adults don’t have $1,000 just lying around, so that’s kind of an issue. However, you remember that just last week, you received this awesome-looking credit card pre-approval from Friendly Bank, so the timing is perfect. As soon as you got the pre-approval, you went online, filled out the application in 5 mins, didn’t read any of the disclosures and now 7 days later you have a brand new shiny piece of plastic with $5k spending limit!! Next steps are amazon.com and macbook pro in the search box.
However, what happens after you have entered your credit card info on Amazon could either be a source of great anguish or successful financial future. It seems absurd to think about it, but something as trivial as buying a laptop, if handled poorly, could result in you being unable to buy a car, rent an apartment or even get a job. Here is the anatomy of a potential disaster.
After you buy the laptop, you have $1,000 that you now owe the bank. The premise of this anecdote is that you didn’t have $1,000 lying around, so unless you get a sudden windfall, or your parents bail you out, or you pull extra shifts at your job, you are unlikely to have it next month either.
Next month, you will get your credit card bill. It will conveniently state that you owe $1,000, but you only have to pay $30. Why the hell not? You will make $30 and they basically you can have the macbook pro for as little as five bar beers plus $1 tip per month. You can cut off 5 beers easily. No brainer.
Well, actually it is quite a brainer. Let’s see what happens, when you input $1,000, at 17% APR paying only $30 per month at Credit Card Payment - Should you pay more than the minimum?
It will take you 46 months – 4 years to pay off your laptop and your $1,000 laptop will cost you $1,363!! Pause for a minute and understand this. You are paying 36% over what the laptop cost by putting it on a credit card and making minimum payments only. Thirty-six percent.
And that’s really a best case scenario when you buy something you can’t afford. What if your car breaks down and you out that on the credit card, too? $500 on the credit card. And that trip for Senior Week? I mean you are only a senior in college once, you OWE it to yourself to go on that trip. You have worked hard for four years, so you need one last hurrah. $700 on the credit card. Next thing you know, your $5k limit is maxed out, you are making $150 monthly payments and by the time you are done, you would have paid the bank a staggering $3,942 in interest over TWELVE YEARS. That’s right, your car emergency, your laptop emergency, and your vacation to relief the stress from all these emergencies cost you 7.6% of the median U.S. family annual income (Five Years Of Recovery Haven’t Boosted The Median Household Income | FiveThirtyEight) and it took you 12 years to pay it off. You will probably have kids when you make the last payment on that vacation.
You are probably thinking, “Ok, so I pay a lot in interest. I get it, but what if everything else is ok? You said that I could not get an apartment because of this, or even a job. I don’t see it.”
Well, what happens if you cannot make the payments? Your score will get trashed. The bank will report to the three credit bureaus that you are not making timely payments, and your credit score will be hit. It only takes one 30 day or 60 day delay to wreck your score. According to Credit.com, “On the other hand, according to a study conducted by FICO on credit scoring impacts, a recent late payment can cause as much as a 90-110 point drop on a FICO score of 780 or higher.” How Much Will One Late Payment Hurt Your Credit Scores?
Given that the average FICO score as of October 2012 was 689, let’s say that drops by 50 or 7.5% hit to your credit score from only one late payment!! Many landlords pull credit reports as part of the application review process. If there are two interested parties and Average Joe has a FICO score of 689 and you have FICO score of 639, because you missed a credit card payment, who do you think the landlord chooses? In addition, many companies, especially in finance, have minimum scores requirement for new employees, since they want to see you being able to handle your own finances before they entrust you with other people’s lives. We are talking scary consequences for one bad decision.
So, please please please - think through this decision tree before you put anything on your credit card. The best rule I can give you is that if you don’t have the cash in the bank, you shouldn’t buy the product. But that’s not real life. Emergencies happen, especially to people who can least afford them, it seems. However, borrowing money from a credit card company should be a final resort. Something akin to borrowing from a loan shark, but instead of wrecking your knees the bank will wreck your life. And I don’t think I am being dramatic. Your life could turn into shambles from irresponsible credit card use. Use wisely and NEVER EVER EVER borrow on a credit card to support a lifestyle.
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