Just like not knowing how much gas is in your tank, unless you're behind the wheel, most people don't know their credit card balance, unless they're in front of their statement. The reason most people are in debt today is because they only look at the minimum payment -- totally ignoring the balance on their credit card and also the interest rate the credit card company is charging.
Your Credit Card Balance is What You Owe
If someone owed you money, wouldn't you be concerned with the total amount they owed you? Of course you would. Unlike the amount you owe on your house, which will take upwards of 30 years to pay off, your credit card balance is actually a current obligation. That means it needs to be repaid currently, hence the term, which means soon. Just like you'd want your friend who owes you $500 to repay you quickly.
However, most people wouldn't be able to pay off their credit card balance(s) quickly unless something surprising and unexpected happened, like winning the lottery, and the chances of that happening are 16,000,000 to 1. Not great odds.
What Happens if I ignore My Credit Card Balance?
It's rather like the first ding you get on your new car. Okay, so you think, it's going to happen eventually. Next thing you know you have another ding, then another, and before you know it, one day you're walking out to your car and you think, "I'm driving a clunker."
Most people only care about the minimum payment; it's not about the minimum payment...at all! First of all, the average credit card balance is around $10,000. If you paid the minimum, it would take you over 33 years to pay off that balance, longer than a mortgage. It's not just the balance; interest is increaing your debt at an alarming rate. To find out how fast, simply divide the interest rate into 72 and that's how many years it will take to double your balance. So, if you're paying 12% interest, it will take six years (72 / 12 = 6) to double your credit card balance without making any new charges.
You need to be concerned about your credit card balance!
Make Sure Your Credit Card Balance Doesn't Escalate
Think about the things you own. Next think about how much you owe. The result of subtracting what you owe from what you own is your net worth.
So, you have $25,000 in your 401(k) at work and you feel pretty smug about yourself. However, you owe $15,000 on your credit card. So much for 60% of that $25,000 balance in your 401(k); you owe it to your credit card company.
Start thinking about your credit card balance in terms of how it affects your net worth. It diminishes it. The larger your balance, the more your net worth is reduced.
How Does the Liquid App Treat Credit Cards?
With Liquid, our new app, we take:
what you have (liquid assets: cash, cash equivalents, and any upcoming payments to be received from work) -- we don't use anything that needs to be sold to generate money, such as your car or your home or your stocks
Then we subtract
what you owe (upcoming expenses: your spending budget, your full credit card balance, and what you're saving up for in the future)
to arrive at your Liquid Number. Your Liquid Number is all you need to know to see if you can meet your current obligations. It lets you know exactly where you stand. In fact, if you don't know it, you don't really know if you'll be okay by the end of the month.
Do you consider just the payment on your credit card or the full balance to be what you owe each month?