Money Matters - Managing Credit: Bad Debt
BOSTON (CBS) - Credit has been the number one concern at my conferences this fall, not unemployment but debt!
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As of August revolving consumer debt was at $822 billion dollars. That is down by $135 billion since 2008. Consumers realize they must pay off more than just the minimum.
Credit is a privilege. Not a constitutional right despite what some people think. Credit allows you to use someone else's money, the credit card company's, to buy the goods and service you need or want.
You are borrowing money every time you use your credit card and you do need to eventually pay back the credit card company. And if you don't pay off your balance every month, the credit card company will charge interest for using their money.
And if you are late in paying your monthly bill or miss a payment, the credit card company has the right to charge you late fees. And they do. The fees are capped at $25 down from $39. Americans paid $15 billion in late fees last year.
About 4% of consumers are late in paying their bills each month and the credit card companies really don't mind for the late fees are a good source of revenue for them.
When you talk about credit you need to talk about debt. There is good debt and there is bad debt. Good debt is the kind of debt that increase your bottom line, increases your net worth. A mortgage normally would be considered good debt.
Education loans, yours or your kids would be considered good debt. An education increases your ability to earn a living and the more education you have the higher your wages.
Bad debt is your credit cards that you don't pay off each month. Here you are paying for things you consume. Groceries, sneakers for the kids, gas for the car, Advil for your headaches, dinners out. And you may be paying for those sneakers for a very long time. By the time you have them paid off the kiddo could be grown.
For example you have a $3,000 balance with a 14% interest rate and you pay the minimum each month of 2% it will take 20 years to pay off the $3,000. That's longer than many marriages last. Oh and by the way, you will pay over $3,500 in interest over the years.
Credit card companies just love it when you only pay the minimum. Most credit card companies are now including 2% of your balance in the minimum payment along with interest and fees.
