TIP OF THE MONTH - April 2008
HEY, WANT TO USE OUR SCISSORS TO CUT UP THE CREDIT CARDS?
Many people are in the habit of using their credit card to make major purchases and then only make the minimum payment on the outstanding debt (as required by the card issuer). Unfortunately, they never figure out what it will cost to really pay off the debt.
Assume a person has a $5,000 balance outstanding and that the interest rate is 18% and, as with many cards, the minimum payment is $100 the first month and 2% of the outstanding balance or $10, whichever is greater. Thereafter, it will take 46 years to pay off the debt, and the total cost will be $18,926, which includes $13,926 in interest that is not tax deductible. Looked at another way, assume part of the debt was incurred for the purchase of a computer costing $1,000. Using the same interest rates and payment arrangement as in the previous example, it would take 19 years to pay off the equipment, and the final cost would be $2,899 which includes $1,899 of non-deductible interest.
It's not surprising that credit card companies urge you to only make the minimum payment each month. We recommend that credit card balances be paid in their entirety each month, and that other means be used for borrowing. While not exactly a "tax return question:, conferring with Abo and Company at tax timemight be a great time to examine personal debt, to determine that the least costly and most tax efficient means of borrowing are utilized.