A few years ago after Linda and I got engaged, we sat down and talked about our money situation. We decided it would be in our best interest to try to eliminate as much debt as possible before we got married. Together we had a whole lot of debt, but we figured any progress we could make would be better than none. As I was looking at her credit card statements I was amazed to find that one of them was charging her a $24 finance charge each month and the minimum payment was $25. Doing the simple math I figured out that each month she paid the minimum payment, she was actually only reducing her debt by $1!
I don’t remember what the interest rate was that they were charging her, but it was obviously pretty ridiculous. And for me, even though I was playing the 0% balance transfer game with all of my credit cards, It wasn’t until I saw this that I finally understood the importance of having a good interest rate.
To put it in perspective. At 0%, paying $25 a month I would have paid off a $1000 balance in a little over 3 years, while on her card $1000 would have taken over 83 years to pay off!
Breaking the monthly payment mindset
So, while I had sort of figured this out by the time we got engaged, a few years earlier I was doing the exact same thing. All my financial decisions were made by asking the question, “how much is it going to cost me each month?” I didn’t care how much my cars actually cost, just how much I would have to pay each month. I didn’t care how much credit card debt I racked up as long as I could afford the minimum payment.
How much is it going to cost me each month?
Lenders love people who ask this question – because they can always find ways to make it cost less each month, but end up costing you a lot more in the long run – filling their pockets in the process.
The key to getting ahead is to start thinking longer-term and break this short-term thinking. I am not sure when I started to make this shift in my thinking, but now every decision I make I ask, “what is the total cost?” I couldn’t care less how much it’s going to cost me each month. I am concerned with the total price that I am paying. And it is amazing the amount of forward-progress you can make in just a few short years by changing the question that you ask!
How to start making changes
The first thing I did was call my credit card companies to negotiate a lower interest rate. For many of them I couldn’t get a 0% rate, so I just left them and transferred my balances to another card company who would. As a caveat to this, if you are going to do this, make sure that you have stopped spending on the cards. If your debt is still growing, doing balance transfers is probably only going to make your life worse in the long run.
But, if you have your spending under control and begin to reduce your high interest rate cards to 0%, you will start saving a ton of money each month on finance charges. Then you take those savings and pay it towards the debt to get your debt paid off quicker!
Related posts:
- 6 steps to reducing your credit card interest rates
- Money Mistake #1 – Paying too much for a car
- Money Mistake #4 – Not having a schedule for bills
- Money Mistake #2 – Thinking that money solves money problems
- Find the highest rates on savings accounts with Bankfox
- Money Mistake #6 – Seeking to impress others
- Money Mistake #7 – Assuming that a college degree guarantees a good job
- Paying off loans or retirement savings
{ 3 comments… read them below or add one }
Thanks. Enjoyed this post very much. Once your eyes are opened…its amazing what you can see.
I liked your point about discontinuing the use of credit cards. If you keep charging no particular rate is going to help. Good post!
Wow this is a great article, I wrote not too long ago about an experience I had with borrowing money to invest in RRSP and then finding out the true cost.
In the end, i borrowed 2500, interest cost me 800 and i lost a ton of money in the end because the market was tanking.
Also, to add to this, calculating interest cost is one thing but how about the value of the purchase.
If you buy a car, you know you will lose around 20% in value each year but you are still paying principal plus interest on it.
So does it make any sense to borrow money to buy a car especially if you can’t even cover the interest.