After several weeks of renovations and a major vehicle repair, I wasn't surprised to learn that my credit card balance was over $10,000. What really shocked me was the message on the last page of the statement:
"If you make only the Minimum Payment each month, we estimate it will take 94 years and 3 months to fully repay the outstanding balance."
As much as I would like to live a long and healthy life, I have no desire to break any world records in longevity. This also raises an important question: What are the long term consequences to your financial well being when you jump down the credit card rabbit hole instead of saving and paying with cryptocurrency?
Read the full story below.
Are credit cards making us financially irresponsible? They originated as a convenient method to pay so we didn't have to carry around a lot of cash, and have somehow evolved into what many people believe is an extension of their ability to pay. Whatever happened to saving up for something you wanted, quite often to find that when you have finally accumulated sufficient funds, your wants may have changed.
Sound financial practice dictates that we should pay our outstanding credit card balance in full every month, but realistically, how often does that happen? Of the US households that use credit cards, the average balance is around $16,000, with 55% of these people falling into the 'revolving' credit trap, meaning they continuously carry an outstanding balance. According to CreditCards.com, as of January 2015 these outstanding credit card balances make up the majority of the $884.8 billion outstanding revolving debt balance in the US.
The trip down the credit card vortex usually starts out innocently enough and you may even pride yourself in the fact that you diligently researched the options and found the lowest rate available. The truth is however, the credit card companies don't want you to pay off your balance because they are making an enormous profit charging fee after fee, some of which you may not even be aware of. The low rate advertised may only be a six month trial, balance transfers almost always carry a significantly higher interest rate, and if you do not make the minimum payment two or more times in any twelve month period, your 'bargain rate' may increase to 25% for a full six months. As a further example of some of the additional fees charged, RBC (Royal Bank of Canada) charges 2.5% over the benchmark foreign currency conversion rate on international purchases, $3.50 cash advance fee (plus a higher interest rate), $45 dishonored payment fee, $29 overlimit fee, and some of the Rewards cards have annual fees as high as $399.
Rewards cards are a popular choice for most people but they come with significantly higher rates of interest. All of the Canadian credit cards I reviewed that offered rewards had an interest rate of 19.99%. That changes when you acquire some of the deluxe, gold, or platinum versions such as the American Express Platinum Card that charges 30% interest and has an annual fee of $699.
While there are too many credit card fees and interest traps to mention, one of the most insidious personal financial pitfalls has to be the minimum payment. Of the people stuck in revolving credit card debt, 11% routinely pay nothing more than the minimum payment. If the minimum payment is $10 a month plus interest and fees (RBC minimum) on a $16,000 debt, and you are not paying attention to the fact that almost nothing of the payment is attacking the balance, you may be lulled into a false sense of security thinking your $276 payment is a substantial one. At that rate, your credit card balance won't be paid off for 130 years. If you maintain that balance for even 40 years, you will have paid almost $128,000 on a $16,000 credit card bill.
The real damage to your financial future from living a life of revolving credit comes from the lost opportunity of investing all those years of wasted payments. If you had invested the $276 every month for 40 years at 5% interest, your retirement nest egg would be $421,181 richer, and a 7% return would see growth to $724,448.
Fast forward to the future of a financially responsible generation paying with bitcoin and other cryptocurrencies that are owned and not borrowed. This 'internet money' can function with the same discipline as paying for everything with cash, only with many added benefits. Because there is a fixed supply, there will never be value depreciation because the government decides to print more money (extreme cases: Zimbabwe and Venezuela). Early savings of choice cryptocurrencies have the potential for substantial growth in value, a feat that fiat can't deliver. They also offer a level of identity security that can't be matched by credit cards. It may be up to the millennials to take charge, fix the credit card debt mess, and return us to living within our means. Is this the turning point where we finally see the lessons of the past resonating with a new, enlightened, and fiscally fit population?