NEW YORK (MainStreet) — A new survey sheds light on how expensive debt can be.
According to the September 2014 Federal Reserve Bulletin, 74.5% of American families have debt. While the focus surrounding debt generally involves taking a host of measures to become whole with the creditor, consumers typically overlook the cost of the debt.
Debt can be expensive in terms of interest. You may have found a great deal on a new television, but if you used a credit card and kept the balance on the card, instead of paying it back in full, the interest charges likely erased any savings you scored on your slam-dunk television purchase. This is an especially important reminder as the holiday shopping season commences, where almost half of consumers say they’ll spend $250 more than they did last year, as MainStreet reported.
Aside from the money in interest you’re throwing down the drain by taking on debt, it’s also costing you in the form of a higher interest rate on a loan if you’re in the market for credit. This is because those with debt are viewed as higher risk customers and therefore have a lower credit score. The creditor needs to be compensated for taking on the additional risk of lending to you, hence why a higher interest rate is charged.
“It’s easy to underestimate how much a credit score can cost – or save – you over a lifetime of borrowing,” said Gerri Detweiler, director of consumer education at Credit.com. “Most people understand that it affects their ability to get a car loan or rent an apartment, but they underestimate how much their credit affects how much they pay in interest.”
According to the Credit.com report, “an average credit score can ultimately cost a consumer more than $279,000 over the course of his or her life in interest payments.”
Remember, your utilization ratio, which keeps tabs on how much credit card debt you have, accounts for 30% of your credit score, behind paying bills in a timely matter, which makes up 35% of the score.
Consumers in debt who are only making the minimum payment are treading water. They’re not making any progress. In fact, minimum payments are calculated in a way to keep consumers in debt, which is why the Credit CARD Act of 2009 required issuers to delineate how much money in interest and how long it would take to become debt-free if only the minimum payment was paid.
As a general rule of thumb, aim to pay double the minimum payment each month, which will make you whole with the credit card issuer within two years, providing a much needed boost to your credit score that has been tied down by burdensome debt.
- Written by Scott Gamm for MainStreet. Gamm is author of MORE MONEY, PLEASE.