I’m always amazed when I look at my credit card statements and see the huge gap between the “New Balance” and the “Minimum Payment Due.”
On a recent statement: New balance $5,749. Minimum due $115. APR 13.24%. Penalty APR 27.24% (!)
With credit card interest inching higher every year, how can it possibly be a good idea to even allow that kind of debt in the first place?
And as if those rates that I saw on my statement are not high enough, I recently came across this article that says credit card rates are now even higher. In fact, at nearly 15%, they are at record highs. How can that be? We now have legislation in place to protect consumers from credit card fees, don’t we? Well, it turns out that the CARD Act cracks down on certain fees and requires more disclosures, but it does NOT cap interest rates.
Legislation to protect consumers sometimes backfires, and it looks as if this is one of the cases where it does, at least to some extent. Since the CARD Act does not allow credit card companies to retroactively raise interest rates, but does not cap interest rates on new customers, credit card companies are protecting themselves by essentially forcing new customers to accept extremely high rates.
The article goes on to examine the different rates offered based on different credit scores. The lower your credit score, the higher your APR – IF you can get a credit card, that is. But as I’m reading, all I can think is, “But this is insane. With 20% APR on even just a few hundred dollars, your debt will snowball so fast, it will quickly get completely out of control.”
So what’s a consumer to do?
The answer is obvious, although not necessarily easy to accomplish: Consumers must avoid credit card debt at all costs – yes, even at the cost of having less. (Do you really have “less” when you’re debt-free?)
But is it doable? Let me share a story with you. I met my husband back in 1990. I was 18. He was 26. Freshly out of college, he was driving this ridiculously old, beat-up Suzuki Swift. No air-conditioning, chipped paint, a tiny engine. The thing would hardly start each morning. I remember asking him if he was hoping to drive a better car someday. And his reply: “Sure, after I save enough to buy one.”
That’s when I realized that, bless his responsible soul, my then-boyfriend had never bought anything on credit. He always saved for a goal, sometimes for months or years. Only when he saved enough, did he allow himself to purchase a certain item.
His parents, now my in-laws, are the same. Over dinner recently, they proudly talked about how they never got into debt. With the exception of their house, they always insisted on living within their means. Even when they went on vacations with friends and those friends wanted to go to a fancy hotel, they simply said, “That’s fine. We’ll go to a more basic hotel, and we would love to meet you every morning at the beach.” No keeping up with the Joneses! No getting sucked into “I want X, I want it NOW, and if I don’t have enough to buy it, I’ll finance it with credit.” Beautiful in its simplicity, it’s a system that had saved them from serious financial trouble, and allowed them to comfortably retire at the age of sixty.
We live in different times, of course, and the pressure to buy, to consume, is more intense than ever. But the Great Recession has been an eye opener for many Americans, teaching us that the “live beyond our means and finance it with credit” is not the best choice. With frugality becoming more acceptable, even fashionable to some extent, and with these insanely high credit card rates, perhaps it’s time for American consumers to resolve to do whatever we can to live within our means, avoid the “must buy it now” trap, and work towards one of the most important financial goals one can achieve: living debt-free.