Thursday, May 30, 1996
'Til Debt Do You Part
by Sandyprice

"We make a lot of money. How come we never have any to spend?"

The lovely Mrs. Price used to ask me this every time the subject of our combined income came up. The answer: we were paying more than three times what other people have to pay for everything.

Why? We were "budgeting by credit card minimum payment"---paying the minimum on our cards and keeping them maxed out. Until you run the numbers, you might not know how that nasty little habit can trash your finances. Take this scenario. . .

A typical credit card charges 18% interest per year, and requires you to pay a minimum of 2% of the balance. Now suppose your credit limit is $3000, and you notice it's paid down to $2000. Great, you think, time for a spending spree. You rush out and charge your card back up to $3000, then start paying the minimum to whittle it back down.

Do you know how many dollars you'll pay to get the balance back down to just $2000? Better sit down for this one, Fools---if you charge NOTHING MORE, you'll pay over $3770, about 3.8 times what you borrowed (over about 79 months), for the privilege of using $1000 of the bank's money. And you'll still be $2000 in debt!

Ouch!

Now, if you have a 3% balance payment requirement (and you pay the minimum) you'll do a little better---paying about $2000 (over 72 months, this time) for the privilege of using the bank's $1000 advance. It's still ridiculous---and it's no wonder your bankers thank you!

So how do you escape the credit card trap? You can be free of all credit card debt in less than 6 years (probably less than four years) by doing the following:

1. STOP RUNNING UP BALANCES. If you doubt you can do this, cut up your credit cards. From now on, you must not run a balance from one month to the next (barring true emergencies).

2. Pry loose as much money as you can each month above what you're paying now. The more money you can free up, the faster you'll get out of debt. This will be your initial "hammer" to smash the debt flat. If you're saving any money (except in a 401K where your company matches) SUSPEND SAVING and apply that money to paying off your balance.

You say you're investing it in Foolish investments that will earn you more than the 18% you're paying on your credit cards? Well, maybe so---but don't forget you'll have to pay taxes on those earnings sooner or later, which may well result in less than the sure 18% you'll save paying your cards down.

3. Arrange your credit cards in one of two ways: either from the smallest balance to the largest, or from the largest interest rate to the smallest.

4. Now, pay the _minimum_ on all the credit cards except the first one on your list. For that card, you'll apply as much money as you can afford to pay. This large payment will hammer it flat fast. (The first arrangement in Step 3 gives you the satisfaction of eliminating your bills faster. The second method will save the most interest cost.)

5. After you've paid off the first card, take the total money you were paying on it and add it to what you're paying on the second card, and hammer that rascal down. As each card is paid off, more money is available to pay down the next. When they're all paid off---start saving that money each month.

Add up all your credit card bills, and imagine what you could do if YOU got that money each month instead of the banks. A deliciously Foolish prospect!

Transmitted: 5/30/96