Avoiding Evil Credit Card Debt

Katie Young
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Wednesday - September 20, 2006
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A column last month, “The Miracle of Compound Interest” got such great response that Brian Chang, CFP, CLU, ChFC, CFS and a partner in the firm of Deutsch & Chang, agreed to offer more important financial advice to The Young View readers.

You’ll remember that Chang, 30, also teaches money management seminars three times a year at Kaiser High School, University of Hawaii at Manoa Outreach College and at Leeward, Windward and Kapiolani community colleges.

This month, he explains “Credit Cards - The Root of All Evil.”

“Here is my definition of a credit card,” says Chang. “It’s a means of buying something that you don’t need, at a price that you can’t afford, with money that you don’t have.

“If you have a $2,000 balance and you only make the minimum payments, it would take you 30 years to pay it off and add about $5,000 in interest to that (assuming a rate of 18 percent).”

Chang says some friends of his went on vacation and charged the entire trip to their credit card. The following year, when they were leaving for their second vacation, they hadn’t even paid off the first one.

“Let’s say you go to the department store and purchase a shirt with a price tag of $50,” explains Chang. “But when the clerk rings up your total, she says it will be $150. You tell her that the price says $50, and she replies, ‘Yes, but we know that you are putting this on your credit card and only make the minimum payments, so when you are done paying for this it will cost you a total of $150.’”

That’s how people should think when using a credit card, and always try to pay off your balance in full every month.

I’ve been a perpetrator of credit card ignorance for years. My father’s pleas of “pay it off every month, pay it off every month!” fell on deaf ears until recently. Now, when I think what I could have purchased with that money wasted on interest fees, it makes me ill.

Chang notes that for many people, it’s a mental block. Maybe they have the money in the bank to pay off the debt, but feel they don’t want to do it because then their bank account balance will go down. It might not make sense to think that way, but it happens.

“Compound interest is a marvelous thing when you are investing,” says Chang. “But it works against you with credit card debt. You have to be on the right side of the equation - the receiving end, not the paying end. Having credit card debt is compound interest in reverse. Now you are paying it to the credit card company.”

Chang explains a math trick called the Rule of 72. It says that if you divide your expected rate of return into 72, the answer you get is the approximate number of years it will take for that money to double. If you are paying 18 percent interest on your credit cards, then your balance will double every four years (72 divided by 18 equals 4).

“Want a guaranteed, risk-free, tax-free investment that could give you double-digit returns?” asks Chang. “It’s called paying off your credit card balance because that is interest you will no longer have to pay every month.”

And what to do with that money you no longer have to pay to the credit card company? “Sock it away somewhere,” says Chang. “Don’t just let it go to waste when you’re already used to living without it. Now, instead of trying to dig yourself out of a hole, you’re building up a mountain.”

People think they have to do drastic, life-changing things to make a difference, says Chang. But really it’s just a lot of little things that really start to add up.

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