Debt isn’t necessarily “bad.” Not many people would be able to buy a house without a mortgage. But many Americans have developed a debt addiction — and many never fully pay down their credit card balances. In the third quarter of 2014 household credit card debt increased yet again to $6,870.1
What’s a bit worrying is that credit card debt seems to be plaguing the youngest workers. More than 75 percent of young people (18-24) who rent report that they spend more than they earn every month. More than 20 percent say they overspend by $100 or more each month.2 And this isn’t because they’re spending their money on craft beers and wall climbing. Forty-two percent of 18-24 year olds say rent is their biggest budget item, 22 percent report that food is their top expense and 18 percent say transportation is what eats up their budget. And it’s easy to see why. Starting salaries, along with the rest of wages have been virtually stagnant for two decades but have really taken a hit since 2000.3
Don’t Get Caught in the Debt Trap
The simple fact that it is way too easy for debt to get out of control is why it is important to avoid debt as much as possible in the first place. Saving for large purchases or, as some stores have begun offering again, buying items on layaway are two alternatives to credit cards. Also, unless you are going to pay off your card in full at the end of the month, charging for smaller items such as fast food, groceries and filling up the car can add up fast. You don’t want to still be essentially paying for groceries you ate five years ago because you didn’t pay off that credit card balance.
The Differences in Debt
The truth is, only making the minimum payment on your credit card each month won’t do much to decrease your balance. Credit card debt is revolving debt — meaning it is not a defined loan in the way a mortgage works — with a planned payback schedule (amortization).
See this chart for the difference. In short, you need to pay back appreciably more than your minimum monthly payment, and not charge more, to make a real dent in a credit card balance.
The Revolving Debt Trap
|Revolving Debt* (credit card)||Fixed Debt** (installment loan)|
|Interest rate (APR)||15%||15%|
|Monthly payment amount||$525.00/month (revolving)*||$525.00/month (fixed)*|
|Years to payoff||15 years||3 years|
|That's a difference of:
$4,500 or 12 Years to Debt Freedom!