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the dangers of debt

Posted : April 16, 2018
Last Updated : August 19, 2019

the dangers of debt

Debt will suck the life out of your financial plan. Learn how to recognize some of the "debt myths" that exist today, understand the dangers of debt, and compare the cost difference between cash and credit.

Debt Myths

When you imagine your life as a young adult, it probably includes a driver's license and a credit card. While a driver's license is good and a necessary tool in life, a credit card is not. We want to help you avoid learning the ugly truth about debt the hard way. Here are three money myths you need to understand:

Myth: You need to have a credit card.
Truth: A debit card will do everything a credit card will do – except put you into debt! Why? Because a debit card uses money you have in your account. You don't need a credit card and you certainly don’t need the debt that goes with it.

Myth: Car loans are a way of live, and you'll always have a car payment.
Truth: Staying away from car payments by driving reliable used cars is what the typical millionaire does. That is how they became millionaires. You don't need to have a car loan in order to drive a car. You can, and should, pay cash for a car.

Myth: Credit is fun because I can buy whatever I want.
Truth: When you owe money to others, you can’t continue to buy whatever you want because your money is used to pay debt. While buying things may be a lot of fun, having to pay for them for a long time is no fun – and it gets expensive.

Cash or Credit

Paying with cash means you can buy something right away if you have the money. Buying something on credit also allows you to buy something right away. But, if you use credit, you will have something to pay later. Your payments will stretch out over time and include even more money when you add interest.

If you pay with cash, you won't have to worry about paying anything else later. For example, let's say you really want the latest running shoes. Your favorite store has the shoes on sale for $100. If you paid cash, how much would you pay? $100 (And you might even get an extra discount with cash if you ask). If you use the store credit card and just make the $10 minimum monthly payments, how much would you pay? With interest, you would pay $110, and it would take you eleven months. More than likely, the shoes would be worn out by then.

The Cost of Credit

Your favorite store offers a credit card with a 20% annual interest rate (1.7% per month). For larger purchases, most credit cards charge 3% of your balance or a monthly minimum payment ($10/month on this card), whichever may be higher. The cost of credit is magnified when your purchases get bigger. For example, if you used the store credit card to purchase $1,000 worth of stuff (like a new laptop) and just made the minimum monthly payments, the chart below shows what your first year of payments would look like?

Month Minimum Payment Principal Paid Interest Paid Remaining Balance
1 $30.00 $13.33 $16.67 $986.67
2 $28.60 $13.16 $16.44 $973.51
3 $29.21 $12.98 $16.23 $960.53
4 $28.82 $12.81 $16.01 $947.73
5 $28.43 $12.63 $15.80 $935.10
6 $28.05 $12.47 $15.58 $922.62
7 $27.68 $12.30 $15.38 $910.33
8 $27.31 $12.14 $15.17 $898.19
9 $26.95 $11.98 $14.97 $886.21
10 $26.59 $11.82 $14.77 $874.39
11 $26.23 $11.66 $14.57 $862.73
12 $25.88 $11.50 $14.38 $851.23
Total: $333.75 $148.78 $185.97  

Keep in mind: This is just for the first year of your payments. In this example, it would take you 131 months (over 10.5 years!) to pay off the $1,000 purchase if you just made the minimum payments! And, your total interest payments would be $991 making your total cost $1,991! That's quite a difference between paying with cash versus credit!

Final Thought

Debt, and making payments on debt, does not need to be a part of your life.

Source: Ramsey Solutions
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