Archive for September 2011

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.