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When Being a “Deadbeat” is a Good Thing

Piggy bank or credit card

Piggy bank or credit card

I am surprised by the number of people who don’t pay off their credit card bill in full each month. I am not speaking of folks who don’t have the funds to pay their balance. I am speaking of people who have the money available, yet choose to not pay off their credit card balance.

 

Recently, Beverly had some extra money. She was debating between paying off her credit card in full and depositing the funds in a bank savings account or CD. I recommended she pay off her credit card balance. It makes financial sense to do so.

Credit card interest rates currently can be as high as 23% or more, depending on your credit worthiness. Many banks, meanwhile, are paying 0.01% to 0.03% interest on small balances in savings accounts. Short-term CD interest rates are not much higher. Online banks are currently paying around 1% interest.

This is why it matters:

Say your credit card balance is $5,000, you don’t make any additional purchases, and you pay $200 a month. If your interest rate is 15%, it would take about two and half years to pay off the entire balance. The total interest you would pay is about $1,000. Those things you bought for $5,000 end up costing $6,000.

Meanwhile, if you have $5,000 in a bank savings account earning 0.015% interest, and assuming you don’t add any money, in those same 30 months you would have made a little less than $2.00 in simple interest.

There is a $998 difference between paying $1,000 in credit card interest and earning $2 in interest on savings. What could you do with that $998?

Credit card companies are not our friends. They have one goal: to make as much money as possible. Since they make significant profits from interest and fees, they love cardholders who pay interest every month. Cardholders who pay their credit card balance in full each month are called “deadbeats.” Although credit card companies charge merchants for every purchase, generally deadbeats are not profitable.

Your financial security is more important than credit card company profits. There is no security in unnecessarily maintaining a credit card balance. Security lies in being as debt-free as possible. After you pay off the credit card, extra money can go to savings. If hard times come, you are able to focus on your immediate basic needs without the added burden of paying off existing debt.

Alternatives to credit cards are bank debit cards and prepaid cards. See my blog post, Staggering Growth of Prepaid Cards: A Smart Choice for You?

If you prefer to use a credit card, only charge what you can pay off each month. Become a credit card deadbeat.

This blog is published to provide you with general information only, and is not intended to provide specific or comprehensive advice.  Money Care, LLC encourages individuals to seek advice from competent professionals when appropriate. The names of the individuals in this article have been changed to protect their privacy.