The Broke Professional - Optimize Your Financial Life

Don’t Fall for the Minimum Payment Scam

Don’t get trapped!

I’ve written a lot about credit cards and their many advantages.  Things like earning rewards, extended warranties, travel benefits and fraud protection just to name a few.  I wrote a post very recently about how credit cards are so much better than debit cards.

But credit cards can also be death to your finances.  If you don’t pay on time and in full, you will be subject to late fees and interest.  A LOT of interest.  Credit card interest rates are easily in the double digits.  And some cards can be in the 20% range.  There is no reason anyone should be paying this much interest.

And consumers know this.  Most adults know that not paying your credit card in full will lead to interest being charged to your balance.  Knowledge isn’t the problem.

The problem is that the credit card companies have made it palatable for consumers to carry a balance and be charged interest along the way.  The way they do this is by offering the “minimum payment.”

And it’s a complete scam that is designed to take money from consumers and turn it directly into profits for the credit card companies.

‘Til Debt Do Us Part

Here is a screenshot from one of my recent credit card bills:

Every credit card statement includes a message like this.  They are literally telling us that making the minimum is bad for our finances and showing us how bad it is.  In this case, the minimum payment was $25.  That’s such a reasonable amount why wouldn’t I take the credit card company up on this offer?

Because the interest rate on this card happens to be 15%, and it would take me 2 years to get out of debt.  And most people have multiple credit cards asking for a minimum payment.  And all of this assumes that you will never spend another cent on your card (which is why it’s called revolving debt by the way.  Debt is being paid off while new debt is being created).

So even with this warning from the credit card company itself, why do so many people just default to just paying the minimums on their cards?  Because it’s just easier.

We live in a monthly payment type of society.  And it just seems a lot cleaner to add your credit card minimum payment to your pile of monthly obligations.  Put it on auto pay along with the car loan, student loan and mortgage.  Just set it and forget it right?  But in this case, forgetting about all of that interest building up in the background will destroy your finances.

Credit Card Debt is an Emergency

There is no such thing as a free meal.  If you get a “free” meal, you will most likely be on the receiving end of a sales pitch.  Just eat, smile, nod and be on your way.

Paying off credit card debt is the closest thing to a financial free meal you can get.  Getting into credit card debt and paying 20% in interest month after month is not ideal.  A situation like that, which many families find themselves in unfortunately, will keep you in financial prison forever.

But once you realize this and commit yourself to getting rid of that debt, no other financial decision matters.  As high as credit card interest rates are, there is no investment out there that would justify you not getting rid of that debt as fast as possible.

If you’re paying 20% interest on a credit card, getting rid of that debt will be the equivalent of getting a 20% return on your money!  While avoiding the debt is a much better first step, paying it off ASAP is the next best thing.

That’s why I consider credit card debt an absolute emergency!  All discretionary spending such as new cars, vacations and fancy dinners out should be put on hold until the debt is gone.  It’s much easier said than done but it’s the only way you’re going to get out of financial hell.

The worst part is that credit card companies don’t want you to feel this.  They want you to feel comfortable shelling out 20% more money than you should each month.  The goal is for credit card debt to become the “new normal”.

But you know better than that.  Take care of credit card debt first and then focus on your other goals.  That’s the closest thing to a financial free lunch you will get.

Enrich Yourself, not Visa

Banks make a TON of money off of credit cards.  That’s why we will keep getting bombarded with credit card offers for as long as we live.

It’s actually pretty absurd.  Banks are simply offering a 30 day loan and charging an exorbitant amount of interest for it.  At least with an auto loan you can enjoy your car and get some use out of it.  But with credit card debt there is no collateral that you can really make use of.  Those fancy dinners out are just a memory at that point.

So don’t fall for the minimum payment scam.  There is no use for it except to keep consumers in debt for their entire life.  It’s all very sinister if you really think about it.  People become depressed and even commit suicide because of debt.  But as long as banks continue to profit off of credit cards, they couldn’t care less.

Free yourself and pay off your debt in full!

Share

How to Raise Your Credit Score FAST

Ride some coattails to a higher credit score!

Living off the grid sounds great.  You don’t have to field calls from telemarketers or keep up on with the latest Trump headline.  As long as you find a way to take care of hygiene once in a while, life will be good.

For those of us not looking to live in the wilderness with our family, a credit score becomes very important.  To get a house, car or education, you will need a loan at some point.  In order to get a loan, and then get a great interest rate on the loan, you will need a great credit score.

Many writers, including myself, have written about how to increase your credit score.  FICO, the people who assign your credit score, even have a nice graph that shows what factors affect your score the most.

As long as you make your payments on time and keep your credit utilization low, you should be good.

It can take years to build up a great score.  But what if you want to increase your score quickly?  And with almost no work needed?

There is a way to do just that by using a little feature all credit card issuers offer.  Enter the authorized user.

Authorized User Pros

Almost all credit card companies allow you to assign an authorized user (AU) to your account.  The primary card holder will sign them up, and it can be usually done online by entering some information about the AU.

Once the AU is approved, they get their own card with their name on it.  But all charges need to be paid by the primary card holder.  If the AU goes on a spending spree, the burden will still fall on the primary card holder.  So be very careful who you choose.

The AU does get a number of benefits:

1.  Credit score boost!  This is arguably the biggest benefit of being an AU.  If someone is young with no credit history or has a low credit score due to some past mistakes, becoming an AU can be a good option if the primary card holder has a great credit score.  Being an AU will put the primary card holders info on the AU’s credit report.

While nothing is guaranteed in the credit score boosting arena, if the primary card holder has a great score and a stellar credit history, the AU will almost always see a boost in their own credit score.  This can especially be helpful if one spouse has a great credit score and the other needs to build some credit.  Just add the spouse as an AU and watch their score skyrocket.

2.  Using a great credit card they would have otherwise not have been approved for.  Many people either have no credit or a low credit score.  This means they will likely not be approved for any of the awesome reward cards on the market.  Even though the primary card holder technically gets the rewards, if a family member is an AU it’s more points for everybody!

Having access to a great card such as the Chase Sapphire Preferred or American Express Platinum card has many additional benefits such as primary rental car insurance and travel benefits.  And with the associated credit boost that comes with being an AU, they might be able to get that great credit card on their ownat some point!

3.  Responsibility.  With a safety net.  A credit card is like a machete.  It is a tool that can be used to your benefit.  You can track all of your expenses in one place.  And you can earn some great rewards depending on what type of card you have.  Responsible credit card use has many benefits.

But it is also a tool that can harm you if not wielded properly.  Late payments and carrying a balance will dig you a financial hole real fast.  Double digit interest rates will quickly erase any gains from investments you may have.  And it’s really easy to get into credit card debt if you’re not careful.

Being an AU eliminates the risk of you getting into trouble with a credit card.  But only because the responsibility is on the primary card holder!  Hopefully, they are savvy enough to be able to erase your mistake and counsel the AU on not making them again.  This is a rare free pass in the financial world.

So the risk falls squarely on the primary card holder.  The AU is in the clear.  But if they’re not careful, the primary holder just has to make a call and tell the company to drop the AU.  So the risk is there, but can be minimized in an instant.

Big Upside with Little Risk

Adding an AU is an easy process that can be potentially beneficial for the AU.  It can provide a nice credit score boost if the primary card holder has a great score.  And the AU will get the benefits of using a credit card with potential rewards.

The risk falls on the primary card holder.  If the AU has a spending problem, the primary holder has to foot the bill.  Luckily, they can also cancel the AU in an instant.  So the risk is relatively small.

So to summarize, you CAN increase your credit score pretty quickly if you become an AU with someone that has a great score.  A lot will still depend on your own credit activity, but if you make it a point to pay your bills on time and not over utilize your credit, signing up as an AU can provide a nice credit score boost.

Share

Credit Cards vs Debit Cards: Not Even Close

We don't use cash much in this country.  Most online and in person transactions are done by credit or debit card.  Even with things like Apple and Samsung Pay, a card is still the thing making the transaction. But is credit or debit the better … [Continue reading]

How to Stack Bank Account Bonuses

Banks know how to make money off of regular people.  They get some money every time you swipe a credit card and a lot more money from interest payments. They get money from ATM fees and from being able to lend out money that we deposit with them … [Continue reading]

How Many Credit Cards Should You Have?

  Credit cards are one financial topic that everyone has an opinion about.  Even people who don't have much interest in finance will have some sort of take on credit cards. Some people swear by them.  Other people swear AT them.  Some … [Continue reading]

My Favorite Student Loan Calculator

This is going to be a short post, but it should help a lot of people. Since I'm a finance nerd and think about debt payoff and investing a lot, financial calculators take up a lot of my time.  While there are a lot of good investing calculators … [Continue reading]

Pay Off Debt With a Strategy

Debt is a way of life in America.  It's easy to acquire and everyone has got it.  The vast majority of people buy homes and cars with debt.  It's almost impossible to go to college with no student loan debt, especially for any type of graduate or … [Continue reading]

Plan Out Your Paycheck

The key to getting ahead financially is to spend less than you earn.  There is literally no other way to achieve financial freedom.  This applies to billionaires and regular old working people. But it's not easy.  We hear about the athletes and … [Continue reading]

Disability Insurance: Yes, You Need It

Insurance is one thing that everyone needs but very few want to sign up for.  And people who sell insurance aren't exactly the most beloved people on the planet.  But the fact remains, we all need insurance. There are many different types of … [Continue reading]

An Easy and Inexpensive Way to File Your Taxes

Most people file their taxes online nowadays.  I have for the past 4 years.  The fact that I actually enjoy doing my own taxes is icing on the cake. If you have a fairly simple tax return that has a low chance of being audited, filing online is a … [Continue reading]