“It is imperative that we make consumers more aware of the long-term effects of their financial decisions, particularly in managing their credit card debt, so that they can avoid financial pitfalls that may lead to bankruptcy.” Daniel Akaka
Not really much to add to this quote except—-PAY ATTENTION TO YOUR SPENDING!
MAIN TOPIC: What Happened After Esmerelda got her Credit Card?
In Understanding Credit Part 1 you learned of Esmerelda’s foray into the world of credit. Let’s revisit Esmerelda and find out how she faired with her first credit card.
Esmerelda gets a credit card and uses it a few times. Flash forward a few months; Esmerelda got a letter from a credit agency reminding her to pay her past due credit card bill. It turns out that she never paid ONE bill on her new credit card. How did this happen?
This is how Esmerelda explained it to me…..
“I was so proud of myself when I got the card, and I went directly to the web site to input my bank information for direct payment. I patted myself on the back for how responsible I was,” she said to me. After that introduction, I was somewhat perplexed at the bill collection letter she received on behalf of the credit card company.
So I responded, “So, what happened?”
Here’s where the story goes downhill. “I went back to check that my payment had been received,” reported Esmerelda. The credit card site said the payment had not been received. So Esmerelda did what I suspect some of you have also done. She ignored the message and assumed there was just a problem with the site.
Esmerelda went on about her life, and forgot about the message stating the credit card bill was unpaid. Esmerelda didn’t worry too much when her credit card was denied for payment. After all, she still had her debit card. She was a master at “compartmentalizing” and so just forgot about the issue.
As a close confidant and financial resource, she came to me for help. After some prodding, it turns out she input her debit card number instead of her bank account and ABA bank routing numbers into the credit card web site. Had she put in the correct numbers, everything would have been ok.
In the end it worked out ok. Fortunately, her credit was cut off before she had the chance to do much financial damage. She returned to the site, input the correct numbers, and paid the bill. It remains to be seen whether this will impact her brief credit history or not!
Practical Application: The BIG LESSONS!
What are the take-aways from Esmerelda’s unfortunate credit card adventure?
- When you get a credit card, you must pay the bill on time or else………….. bad things happen. There is no way to avoid paying the bill. It will not go away.
- If you do not pay the bill within the allotted time, the credit card company adds on MORE CHARGES, called “finance charges” and “interest charges.” That means you are borrowing money from the credit card company. For that privilege, you pay a fee (finance charge) as well as interest (a percent of the outstanding bill).
- If you continue to avoid paying the bill, then the fees and interest charges (18%) continue.
What happens after 2 months if you do not pay your $100 credit card bill?Month 1 Owe $100 Don’t pay bill for 1 month Owe $100 + $29 finance charge + $18 interest = $147 Month 2 Owe $147 + $26.46 interest=$173.46 And the amount due keeps on going up and up until the bill is PAID IN FULL. |
- Still haven’t paid after 2 months? You owe $173.46 and your bill now goes to a collection agency. That is a company that is hired by the credit card company to collect their debt.
- The bad thing about going to a collection agency is….. you still have to pay the bill, the interest and fees continue to accrue AND the CREDIT AGENCIES are notified of your delinquent account.
- Once you have a non-payment or late payment reported to the credit agencies, more bad stuff happens.
What happens when your non-payment or late payment gets reported to the credit agencies?The credit card company puts a notation in your credit history about your problem(s) making payments. Anyone that checks your credit sees that you had these problems. Potential employers, lenders, landlords make decisions about your worthiness based on your credit report. Your credit score is impacted by your credit report. Poor credit leads to a lower credit score and difficulty getting a loan, an apartment, and a job. |
In life and credit, you must pay your bills. Don’t buy something you cannot afford to pay for AT THE TIME OF PURCHASE. Going into adulthood is difficult.
Learn to pay your bills early and make life easier for yourself.
ACTION STEP:
Get a notebook and label it: “(your name) Personal Finance” and keep it by the computer. Use it to keep all of your personal finance goals, thoughts, activities, and plans.
For a month, pay for everything you buy with cash.
Write and share how it works out.
YAKEZIE SHORT CARNIVAL: Pay Off Highest Interest Or Highest Balance Credit Card – Analysis Paralysis @ Free From Broke - What Scrooge McDuck Taught Me About Finances @ Saving Money Today - Are you a Monthly Payment Buyer or Budgeter? @ Car Negotiation Coach
And the award for understatement of the year goes to…
Barbara Friedberg (!) for “When you get a credit card, you must pay the bill on time or else………….. bad things happen.”
Oh my gosh, Barb. The illustration that follows is absolutely gobsmacking (that is a word, isn’t it?).
You end up paying $73.46 to borrow $100 – after only two months!
That is absolutely insane and a great reason why credit cards are dangerous instruments in the hands of the oblivious and/or those who have trouble managing their finances.
All the best,
Len
Len Penzo dot Com
I agree that it is very easy to get into trouble with the credit cards. There’s a type of deception that we allow ourselves to play into. We think we have it under control until we realize that we don’t. Unfortunately, by that time, it is often too late.
Regards,
Shawn
As if the late fee and finance charges aren’t bad enough, when your credit score goes down you can potentially be putting yourself in a position to pay hundreds, if not thousands, later on due to your credit score (mortgage, car loan, etc…).
@ Len- You are a master at finding the humor!!! Yes, it’s amazing how fast the charges add up.
@ Shawn- Well put. I’m sure somewhere in her mind- Esmerelda thought she had it all under control. She had a tought lesson to learn.
@ Craig -The costs can go on for many years; thanks for bringing that up.
Thanks all for stopping by.
[...] presents Understanding Credit: Part 3 Esmerelda Revisited posted at Barbara Friedberg Personal Finance, saying, “This story tells of a girl who got [...]