The Particular Problems With Credit Card Debt
Credit cards have become amazingly popular over the last couple of decades, to the point where carrying at least one is the rule rather than the exception. There's no doubt that a card is a hugely convenient thing, allowing as it does easy online shopping and removing the need to carry cash on a daily basis.
There is of course also a downside - credit card debts are one of the most costly and dangerous types around. Why is this?
Ease Of Racking Up Debt
The first point is that it's just too easy to spend money using your card. The psychological link between the price of something and how much money that actually is is broken when you're paying by plastic. It just doesn't seem like real money that you've worked hard to earn, meaning it's easy to spend more than you normally would.
In all truth, you're not spending your own hard-gained money at all, as this is after all a credit card. You're really spending the card issuer's money, on the understanding that you'll pay it back. One day. Again, this makes it easy to build up debt that you simply couldn't acquire if you stuck to using cash.
High APRs / Interest Rates
The next problem is the sheer expense of a card: where a good mortgage will currently charge in the general region of 5%, and a personal loan often around 10%, credit cards routinely charge 20% or more. This is truly expensive if you stop to think about it: if the price of everything you bought went up by 20%, would you be happy? Again, this breaking of the psychological link between your spending and your actual money means that the interest rate is often an abstract that's easily ignored.
High Fees and Charges
On a related point, once you start getting into difficulties and making late payments or going over your limit, you get into the region of charges. Quite how penalising people financially will help them get their finances back in order is hard to see, but then in the world of finance profit rules supreme rather than common sense.
The fees are not now as onerous as they were only a few years ago, where being hit with a £30 penalty for paying late was commonplace. This practice of 'punitive' charging was stopped by regulators, and now a charge of £12 or less is more common, but even so if you're struggling with money and debt then any extra charges aren't going to help at all.
The Biggest Danger - Credit Card Minimum Repayments
Finally, we turn to the most insidious aspect of credit card debt - the minimum repayment. As we all know, you're not obliged to clear your balance every month. You are, however, obliged to clear at least a certain percentage of it. This used to be around 5%, but over the years has drifted down and now 2% is almost the norm. The big problem with this is that this repayment will often barely cover the interest charges, meaning that your actual debt is hardly reduced at all, and you'll go on paying through the nose for years.
Some companies now calculate their minimum repayments by adding up all the interest and charges due, then adding a percentage of the balance on top of that. While this may seem unwelcome as it results in higher monthly repayments, the overall cost over the life of the debt is much reduced, and it will be cleared more quickly.
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- Getting Credit Card Debts Under Control
- The Slowest Way To Pay Down Credit Card Debts
- 4 Ways To Tackle Credit Card Debt
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