The perils of paying the credit card minimum after unabashed charging
Over the years I’ve had friends end up with massive credit card debt. My friends amassed the debt by spending unabashedly and then only paying the monthly minimum.
It’s not surprising a person might think it is fine to pay the credit card bill minimum. Paying the minimum is offered front and center on the bill.
In fact, the words “Pay the minimum” almost endear like a friend helping when you are in need. “Don’t worry about it. We all at times spend more than we have. Pay back what you can over time,” says the credit card.
Unfortunately, the easy offer is actually a trap. When paid over time, a $1,000 weekend jaunt can result in a $3,000 haunt.
To help my children avoid this luring trap, I taught a lesson on credit cards.
The magic of shopping with a credit card
Our lesson began by comparing the ease of purchasing with a credit card relative to purchasing with cash. The play store set up in our living room at first only accepted pinto beans as currency.
Counting 150 beans to purchase a teddy however was its own feat. The kids kept getting lost in count; a sudden gust of wind knocked over neatly organized stacks. Plus, when beans ran out the refill jar was way back in the garage — my attempt to simulate pulling out cash from an ATM or the bank.
Then I offered them a magical spoon that when waved allowed them to purchase anything.
Boy did that magical spoon turn things around. No longer did they have to count individual beans or refill in the garage. With one wave of the wand, one purchased a 1,500 bean iPhone and walked out. The bill would come due at some later time. Fun times rolled.
Paying the bill
To explain the bill that eventually appears, I pulled up our most recent credit card statement. The minimum payment due shone front and center. We also reviewed listed fees and interest rate.
To simulate the impact interest rates had on credit card balances, we dropped 90 pinto beans into a Mason and dubbed it “the bill”. Each then received 100 pinto beans to pay “the bill.”
We simulated two scenarios. In the first scenario we paid the entire bill; in the second we paid the monthly minimum.
To make the point exceedingly clear, I simulated extremes
In the first scenario, they paid the entire 90 bean bill. After which each child had 10 beans. I added 10 more pinto beans to represent a week’s worth of wages. The 20 pintos they owned did not afford much in our play store, but with a balance of $0, the bill did not grow.
In the second scenario, they paid the 5 bean minimum. Each child now had 95 pintos. Again, I added 10 beans in weekly wages to give them 105 in total. They felt rich…until they realized the impact of interest on the balance still owed.
The interest grew the bill from ½ a jar to 1 ½ jars. Suddenly, they owed more than the entire amount in their pile. To stress the point, we simulated one more round that in spite of additional wages quickly grew the bill to 2 ½ jars.
Despite their large bean piles, they each declined my invitation for more fun charging at the play store.
Will this lesson prevent them from amassing massive credit card debt? Time will tell. At least, the lesson instilled the risks of paying the minimum after carefree charging.
My kids loved learning about credit cards, fees and other credit card trappings. The lesson reminded me that I had no idea of these issues at their age and learned about credit cards through my own mistakes. They asked me about other financial literacy topics which led to other lessons. Have you taught your children the basics of financial concepts? If so, will you please comment below and let me know how it went?