Credit card debt

Would you pay £5,397 for a computer that actually cost £1,750? Of course not I hear you say, but many people do!!

How is this possible? They purchase their computer using  a credit card or a store promoted charge card, and don’t pay it off in full upon receiving their statement.

What normally happens? The purchaser receives the next statement and pays only the minimum payment due. In this example lets say it’s a new card and no other charges are made on it. The credit card company calculates its minimum payment by charging 2% of the outstanding balance which comes to the minimum payment of £35.

At 18% interest on the balance of £1,750 and a minimum payment of £35 a month how many months will it take to pay off the loan assuming nothing else is charged on the account.(Answer 264 months, or 22 years!!)

How much in interest will have been paid in addition to the original £1,750 purchase over all these months? (Answer £3,647). This brings the total cost of the computer purchase to £5,397.

If you had planned far enough in advance and saved the £35 a month £1,750 would have been saved after just 50 months. By saving the original purchase amount and paying for the computer in cash, you`d  never have to pay a pound more for the remaining 214 months. However if you are  prepared to pay £35 a month, why not continue to put that money in savings for future cash purchases, and not send it to a bank as finance charges?

In reality the balance never actually gets paid off. Why? Because the credit card is continually used for other purchases and the debt cycle continues indefinatly. So instead of paying only for the items that were originally purchased the majority of a persons purchasing power and financial resources are going to the financing companies, which is  a total waste of money. That same money could go directly into future uses. In this example, £3,647 paid in interest could be used directly for other purposes, but only if the original items were paid in cash.

The truth about credit cards…..over time you can always without fail, do more with cash than you ever can with credit!