Doc's note: We first began publishing Retirement Millionaire Daily in October 2015. Since then, we've sent more than 200 issues to our readers.
We've also welcomed tens of thousands of new readers. So every Thursday this month, we're sending our favorite issues from October 2015. If you haven't read these issues, we hope you enjoy them. If you've already read them, use them as a refresher or share them with your friends and family.
For millions of Americans, Christmas goes on long past midnight on December 25... with potentially crippling consequences.
According to the Gallup polling company, the average American plans to spend $812 on Christmas gifts this year. If they put it all on their credit cards... they'll have to add about $68 a month to their regular payments to pay it off in a year.
But for the roughly 18.5 million households that report only sending in their cards' minimum monthly payment (say, $20), it will take more than four years and nearly $300 in interest to pay for Christmas... jacking up the bill for their presents by more than 35%.
According to the Federal Reserve, the average American household has about $7,500 of credit-card debt. And although only 34% of American households carry over their debt every month, about 15% only make minimum payments. That leads to large debts rolling over and rising interest payments each month.
If you only make the minimum payment, you're paying thousands in interest.
Credit-card companies can calculate minimum payments in a number of ways. The two most common methods are to charge 1% of the original debt you're carrying (known as the principal) plus interest, or to charge a flat percentage on the principal (usually around 1%-3%).
Take a 30-year-old making minimum payments on a $7,500 principal with a credit card that charges 17% interest. Using the first method, his first minimum payment would be $181.25 ($106.25 for the interest plus 1% of $7,500).
His minimum monthly payment would get lower each month as his principal is reduced. However, only making the minimum payment would take him nearly 26 years to pay off his debt... and cost him more than $10,000 in interest.
But the flat percentage is worse.
Using an average 2% calculation, his minimum payment would start at $150. It would get lower each month as the principal slowly decreased.
When he makes that $150 payment, it goes to paying off the interest accrued at that point first, and whatever is left goes to the principal. So of that $150, $106.25 pays off that month's interest. That leaves only $43.75 applied to the $7,500 principal.
He's only paying 0.58% of his principal at that point. And that's assuming there are no late fees or new debt added to the account.
At this rate, it would take him 40 years to pay off his debt... and cost almost $17,000 in interest!
The point is, if you're allowed to make lower minimum payments – don't do it. Take another look at the numbers in the table below:
Time to Pay Off
Total Interest Paid
Calculations from Bankrate.com
If you're like the guy in our example, that means you're paying off your card debt for 40 years... plus more than double the original debt in interest payments. Worse, having a card that calculates your minimum payment as a low, flat percentage hurts you the most – you'll be paying 70% more interest, and it will take 14 more years!
So, if you agree that making minimum payments damages your personal wealth and credit, let's move on and clear up the biggest myth out there...
Some people think carrying a small balance each month helps your credit... The idea is that having some debt – but not a lot – shows that you use credit and keep your card active. But that's a false belief. Credit scores account for your credit availability... Having a balance, even a small one, lowers the amount of credit you have available and damages your net worth.
Having a good credit score helps in many aspects of your life. Before you can buy a car, a house, or even a cellphone, your credit rating will be checked. Lenders want to make sure you will pay back your loan or will pay your bills on time. If your credit score is low, they can hike up your interest rate or decline you altogether.
Here at Retirement Millionaire Daily, we believe that credit cards are great for managing your cash flow (by having a centralized record of how much you're really spending each month) and building your credit... when used responsibly.
The No. 1 rule for using a credit card responsibly is to...
Pay your full credit-card balance each month.
This is the easiest way to avoid interest fees and it's how I handle my own credit-card bills. I prefer credit cards that offer rewards, but I make sure my balance is $0 when my bill is due.
If you currently have an outstanding balance, start shopping around immediately for a better card. A simple balance transfer can reduce your interest rate. Some cards offer 0% rates on transfers for the first six to 15 months – during this time it would be best to pay off as much of that debt as possible. Don't accumulate more debt – the purpose of this is to pay down your debt.
And if you are able to get 0% APR, then use the money that would have been going toward an interest payment each month to pay off even more of your principal. If we use the 30-year-old from earlier as an example, he was paying $106.25 for the interest plus 1% of $7,500. Instead, he could have taken that $106.25 and applied it to his principal as well.
As I said, I always pay off my balance each month. And I have several types of cards to get the most bang for my buck. In fact, my staff and I have put together a list of our favorite rewards cards...
Our Favorite Cards
As I mentioned, I am a fan of credit cards – particularly with all of the rewards you can get. We've put together a list of cards we recommend based on personal use, research, and reader endorsements. Have a card you love? Send it in to us at [email protected].
One of our readers, D.F., kindly shared this tip with us recently. If you pay your phone bill with your Wells Fargo credit card, you get free phone insurance with a $25 deductible per claim.
As D.F. pointed out, a cracked iPhone screen alone is $100 for Apple to fix. His previous phone insurance was only $8 a month, but carried a $175 deductible per incident. So with the Wells Fargo plan, you're not only saving the $8 a month, but another $150 per incident.
What We're Reading...
- Find your perfect card with Money Magazine's card matchmaker quiz.
- Here's how one woman paid off $90,000 in debt in three years.
- Something different: A planet-destroying star is causing havoc in our solar system.