These Two Shocking Truths About Credit Card Debt Will Leave Your Blood Boiling!
Get Your Escape Plan Worked Out Now.
Warning: Don’t fall asleep when you see the phrase ‘compound interest’ Knowing about it could shock you into getting your finances back on track, so stay with me on this.
With a repayment mortgage, most of the monthly payments will repay the debt and reduce the balance.
Great news for you, as the interest payments are always reducing.
Also, mortgage lenders will allow you to overpay 10% INTEREST-FREE on the balance of your mortgage each year, and boy, should you take them up on this, if you can afford it, it can significantly reduce the total interest you pay and potentially bring down your mortgage term.
Some people decide what they can afford to overpay each month and change their direct debit. That way, you need to remember you are overpaying. Even if you up the payment by £50 a month, it’s worth doing.
However, with credit card debt, they make it easy for you to go on minimum payments. If you fall for this trap, it means very little of your capital is paid off each month, as your minimum payment is mainly made up of interest.
And so, you’ve got it…. the daily compound interest adds up, and the debt reduces painfully slowly.
Compound interest coupled with minimum payments is a 2 – 0 victory to them, as you are left licking your wounds.
This keeps the nice little profit machine going for the credit card companies, as they drain you of your hard-earned cash every month.
Do they care that the cost of living crisis also has you over a barrel… no they don’t!
The bottom line… pay less off the capital, pay more interest and stay stuck paying off your debt for years; it’s simple.
Oh, and get this final nail in the coffin. As you pay your debt (slowly), and your balance reduces slightly, they further reduce your minimum monthly payments because they are like that.
Or do they want to keep you on the hamster wheel longer? Remember, the less you pay, the longer you are trapped, and the more you pay interest.
Why not make it evident that you should go on a fixed payment that does not reduce your debt? This would pay off the debt faster because they don’t want you to pay it off faster.
If you do nothing else, look at a repayment plan you can afford and set up a direct debit for fixed payments to get the debt paid off quickly rather than reducing minimum payments.
What is compound interest, and why could it ruin your life?
It’s the first of the shocking truths I will unveil to you.
Credit card companies thrive on compound interest; you really should know why if you are going to reduce your monthly outgoings and break free.
Credit card companies certainly want you to avoid getting this! So if you want to escape their vice, read on.
Say you have £10,000 on your credit card and an APR of 20%. Let’s face it, that sort of horrendous rate is standard for these bad boys.
Here is a rhetorical question!
You would think you would pay a simple interest rate calculation on the balance, right?
Wrong! That would not give them enough to keep you trapped, so they don’t roll with that.
Most credit card companies calculate your interest daily, OK, so what’s wrong with that?
Each day they add the interest they calculate to your balance, and then here is the kicker… They charge you interest the next day on the interest they calculated the previous day.
Yes, you’ve got it. They are charging interest on their interest!
This is one of the reasons they end up having you trapped like an animal.
Not just from basic interest but from interest on interest!
No way! Yes, way!
Most Mortgage Lenders do the same. However, there is a vast difference between what Mortgage Lenders and Credit Card Companies do that makes all the difference, which brings me to my second shocker about credit card debt.
Okay, so let’s take £20,000 on a credit card with a rate of 20.65%, the current average rate in the UK.
Let’s use Barclaycard’s repayment calculator and select minimum payments, so this is right from the horse’s mouth.
- Total Interest Paid £31,328
- Time To Pay Back a Staggering 43 Years & 6 Months
Eyewatering.
I know… let’s move to a zero-percent card…
Yes, that is an option, but be aware these introductory offers are not for charity purposes. Being mindful of the following;
- Could they be there to pull you in and trap you?
- Are you seeing a pattern emerging here?
I am not saying you should not consider this an option, but make sure you play your game, not theirs.
They are banking (pardon the pun) because you will not clear the card and will end up paying interest on the whole lot. If you build up too much debt on the card, your options to move will become limited. So then you can’t as quickly hop off to another offer.
If you can pay your debt off during the introductory period, you will beat them at their game.
Also, remember each time you do a balance transfer to a 0% card, you will pay a transfer fee, typically around 2 – 4% of the balance.
Can I use the capital in my home to re-mortgage and consolidate debt?
Yes, you can, and it is a strong option; it gives you a structure to pay it off and often drastically reduces your monthly outgoings, so you can afford to buy that special treat you have been eyeing up. However, proceed cautiously; debt consolidation can reduce your short- and long-term outgoings concerning credit card debt.
But let’s not take your car loan with two years left to pay and move it to a 20-year mortgage!
Come on, that’s not sensible and will cost you way more over the long term in interest.
Seriously though, re-mortgage debt consolidation is an option you could look at; it costs nothing to find out your options.
It could just break you out of the revolving cycle of debt from compound interest and minimum payments.
Wait, I am stuck on a fixed rate with a sickening early repayment penalty
There are options to take out money from your property for debt consolidation or home improvements without getting stung by your lender’s penalty.
Heard of a second mortgage?
It leaves your first one sitting pretty while you add a second mortgage to raise the funds you need, and hence you can take out your cash with no hand slap from your current lender.
Later, when your mortgage is due for renewal, you can look to bring the two mortgages into one to lower your payments further if it’s affordable at this point.
Again with the potential to reduce your outgoings by a significant sum each month, it must be worth a look!
To obtain advice on your options, CONTACT US for more information.
