Credit Debt

You probably know that feeling of giving in to temptation when it comes to making a must-have purchase. And it`s so much easy to cave in when you can pay for it with plastic rather than cash.
But credit cards, just like insurance, loans, buy to let mortgages or any other financial product should be treated with respect. In other words, make sure you really know what you`re letting yourself in for. What might seem a great idea now could turn into a huge problem in the future.
With credit cards, it`s important to properly understand how they work and why the providers are so keen for you to spend money on them.
Consider this example to see how credit card debt can end up costing a great deal more than you might have thought. Jane splashes out on a designer handbag. It costs $1,000, but she reasons that if she puts the purchase on her credit card she`ll only need to pay off the minimum each month, because it will only come to $20.
So far, so good. Jane buys the handbag and can easily afford to make the $20 monthly minimum payment (which in this case equates to 2% of the original amount). She continues to do this until the debt is cleared.
However, what she hadn`t bargained for was that it would take so long! Because she`s only paying off the minimum amount each month, it takes Jane a staggering 16 years to clear the handbag debt. By this time her designer bag will have long ago been consigned to the back of the wardrobe.
During those 16 years, assuming an APR (annual percentage rate) of 15%, Jane will have paid back not only the original $1,000 cost of the bag, but also a whopping $1,214 of interest. The bag will have ended up costing her $2,214, well over twice what was on the price tag.

All this assumes that Jane did in fact make those minimum monthly payments. If for some reason she didn`t, the situation would look a lot worse.
The chances are that Jane, like anyone else, would have added to her initial credit card debt. There will have been another purchase she couldn`t resist. Then another and another and so on.

Once you start to miss minimum payments the trouble really starts. Because you`ll then be charged interest not only on the original debt, but also on the interest you`ve failed to pay off.
To make matters worse, your credit card company will hit you with a penalty if you`re late making a minimum monthly payment. Late payment fees can either be at a fixed rate, or a percentage of the amount of your outstanding balance.
If you fail to make the minimum monthly payment for a second month, there`ll be another late payment fee.

In this way, it is not difficult to see how your credit card debt could end up spiralling out of control.
There is another way in which using a credit card is likely to end up costing you more than you might have bargained for; when you use it to obtain cash. Interest is usually charged from the day on which you received the cash advance on a credit card. This will apply even if you repay the full amount of your credit card debt on the stipulated date of your next bill.
Nowadays it is difficult to lead your life without having a credit card. You need one to rent a car, make a hotel reservation or pay for anything online.
If you are aware of the hidden traps of only repaying the minimum amount each month, or of missing payments altogether, then you can make sure your credit card is an asset rather than a liability.


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