It was just an impulse purchase. They really could not afford it, from a rational sense, but well, it was a tough week at work, family relationships are in a turmoil. They said, what the heck. “We need a lift.” Without much thought, they decided to go for it even though their budget is stretched to the maximum right now. We will just pay the minimum due (on our credit cards) until that promotion comes in. You know, we really deserved to splurge.

Now that gorgeous designer bag is draped on her arm. And you are ensconced in front of that 60-inch HD TV, ready to start some great surf-viewing. Further serious justification ensues; bags do cost that much — “it will boost my professional career look.” He states that he will use the new media set for “serious research and study for his career”.

Nevertheless, soon after the credit card bill rolls in, right on time. Total due $5,000.

We take this hypothetical illustrative couple’s credit card payment decision and plug the results into a credit card pay-off calculator at Time Value — TCALC Online Financial Calculators. The results are highly detrimental, the further out in time that it takes our couple to pay the balance off, the higher the balance remains due to further compounding of the principal balance — note the very lengthy time and the highest interest charges with the lowest minimum pay-off (see chart attached).

• $500 payment per month reduces balance to zero in 11 months.

• $300 payment per month reduces balance to zero in 1.7 years.

• $200 payment per month reduces balance to zero in 2.7 years

• $100 payment per month reduces balance to zero in 12 years!

In reality, if your payment is too low each month, it cannot reduce the principal enough. Your debt simply grows and grows and grows into infinity. Unless you take action with higher payments, you will never be debt free!

Credit cards are not free cash. Credit cards are debt; they are legal formalised loans.

Read your contract, all those pages of tiny print defining terms and conditions that you agree to when you accept your new credit card. In return for the use of the credit card issuers’ money (credit) you are promising to pay the balance in full, at some point with interest. Settle your credit card balance every month, you pay no interest. Paying down only balance increments over time will incur significant interest and carrying charges as is demonstrated in our chart attached.

Immediate gratification equals long-term debt saturation. Credit card abuse is on the rise, often from individuals who knew better but overestimated their ability to pay down loans. Regrettably, there are also individuals finding themselves in dire economic circumstances, have resorted to using every means possible to keep the family finance ship afloat, including maxing out credit cards. They have no choice but to continue to pay the minimum. Scammers also play the credit card game, running up high balances while banking on declaring personal bankruptcy to have the debts eradicated.

The issuer, whether a bank or a credit card company, is not going to absorb defaults from slow or no-pay card holders. Instead, the financial institution will penalise by charging higher interest rates, sometimes across the board. They will prosecute serious cases and in some jurisdictions will have the legal clout to attach liens on the card holder’s property in order to assure ultimate payment.

Credit cards are a necessity in an electronic world, and almost impossible to avoid, particularly if you are a frequent business traveller. They are easier, faster, safer (in some respects than carrying cash), and highly efficient in documenting personal and business expenses.

Let’s not equivocate — it’s the random purchases that can be so addictive and damaging to a credit card balance. After the exhilaration wears off, you look at these things and wonder — why did we do this? Some individuals always have more self-control, using credit cards only for their flexibility and access to goods and services. Their revolving debt is always managed carefully.

Most of us cannot do that — all the time. Impulsive debt crosses all boundaries. It can wreak havoc on personalities, health, family life and careers. Show of hands, please? How many of us buy a present for ourselves almost every time we shop for others on the “gift list”? Be honest.

In order to avoid the pain and recriminations later, it pays to plan carefully for purchases (even groceries) while monitoring our behaviour (and our emotional thought processes) during our personally vulnerable times. Fair warning, though. Forward planning takes tremendous discipline and diligence.

It is so hard — not to buy something. But, the first and best question is to ask yourself if you really need it? And the second is, can you afford this item now — will you have the ability to liquidate the credit card loan balance in a short time-frame.

The third decision, if you absolutely have to use your credit card longer-term, use a credit card pay-off calculator to keep your family finances on track.

What happens to those “absolutely have-to-have” purchases of a year, two years, three years out, five years out. Still paying the minimum on your credit card? The original cost has skyrocketed to twice or triple the original cost as we see in the attached chart.

Yet, you will generally realise less than one-quarter the value of the bag or the HD TV five years later. Were these appreciating assets like a house? No, but the payment of these items continues, long after the TV is outdated by newer technology and the bag has made its way to the back of the closet, out-of-style, relatively worthless.

Recently, the author purchased a few years old Bottega Venata Bag (original cost $2,600) for $25 at a local thrift shop.

Next, we review credit card offerings available in Bermuda, some general security measures, and provide some websites to help you manage your credit card debt.

Sources

Track Your Credit Card payments and manage your debt reduction at About Money — 7 Best Credit Card Payoff Calculators by LaToya Irby, Credit/Debit Management Expert

http://credit.about.com/od/reducingdebt/tp/credit-card-debt-payoff-calculators.htm

http://credit.about.com/bio/LaToya-Irby-26017.htm

TCALC: Credit Card Payoff Calculator. How long will it take to payoff my credit card debt?

http://www.timevalue.com/products/tcalc-financial-calculators/credit-card-payoff-calculator.aspx

Martha Harris Myron CPA CFP JSM Masters of Law: International Tax and Financial Services. Appointed to the Professional Tax Advisory Council, American Citizens Abroad, Geneva, Switzerland. President: The Pondstraddler Life™ Consultancy: international financial planning, publications, presentations for the challenging lifestyles of multinational individuals and their families residing, working, crossing borders, and straddling ponds in the North Atlantic Quadrangle. Specific focus for residents of Bermuda, the premier international finance centre. Contact: martha@pondstraddler.com