Dollar billCredit: Stock

It’s very important that you pay attention to the cost of financing your lifestyle.  While it’s preferable to pay cash not everyone is that fortunate in today’s economy and most never calculate the true cost of sustaining their lifestyle.  Retailers often offer inducements of no interest for 12-18 months but charge you a hefty rate if the balance isn’t paid off by the end of the Introductory Rate period.  Interest will accrue from day one based on the balance.

How many no interest offers have you accepted recently?  Do you know when the “no-interest” period ends?  It may be time for you to perform a financial checkup.  Consider using a spreadsheet to list all of your credit and revolving accounts.  List the account name, minimum amount due, balance, credit limit and most importantly the interest rate you are being charged.  
Sure I know there is plenty of wonderful software options on the market to tracking spending, trends etc., and will provide you with charts and graphs but nothing beats taking ownership yourself and tracking this yourself.  To understand your situation you have to be engaged in the process.  It’s more impactful when you enter an interest rate of 29% on a spreadsheet compared to someone telling you in a report.  

Now that you have listed your obligations sort them from highest to lowest based upon the interest rate you are being charged.  The higher interest accounts need attention now.  Most often people focus on the accounts with the largest balances but the interest rate is the key as this is the true cost of the money you are spending.  What does that mean if you only pay the minimum each month?

Credit card companies set the minimum payment due different ways so it’s advisable that you check with your company.  Some companies will charge you a percentage of the balance on the card as the minimum monthly payment while others will require you to pay the interest that is on the card.  For example if you have a $5000 balance and your Annual Percentage Rate is 29%, you will pay approximately 1/12 of that each month meaning your minimum monthly payment would be 1% of your balance or $50.

Not bad but let’s consider the cost of carrying that balance.  Let’s assume you have that same $5000 balance at an APR of 29% and the monthly minimum payment is based 3% of your balance.  It would take you 463 months (38.5 years) to pay off the balance and the total interest charged would be $19,171.31.  That’s a total of $24,171.31 when you factor in the $5000 you charged!

Is the picture getter clearer now?  That’s why it’s important to perform annual financial check-ups including obtaining your credit reports.  Pay off those high interest credit cards.  If you need more help there are great books on the subject to help you get started now.