Credit has never been easier to obtain.
We’re bombarded with offers every day: interest-free credit card balance transfers, interest-free financing on home furnishings, big-screen TVs and appliances, and low rates on buying a new car.
It’s no coincidence that right after Christmas, your friendly bank starts peppering the media with offers of interest-free periods on balance transfers. This is a time of crisis for many people. The cards have run out to have a good Christmas and the debt hangover is just beginning to hit. The first post-Christmas payments are coming up and there is no cash to pay them.
The interest-free option on credit card balance transfer seems like a blessing and is eagerly accepted, but all you’re doing is kicking the stinking debt further down the road of reckoning. When the time comes to start paying interest at rates of 19-21%, there is still no cash and the debt is increased by getting more cards and shuffling the debt.
The deck of debt
The debt shuffle is getting cash advances against remaining balances to make minimum payments on other cards and for other monthly payments. This is where the fees and charges kick in. High fees apply to get the cash advance and interest rates kick in immediately at 21% or more calculated daily.
Effective rates above 50% in cash advances
Fees and charges on cash advances prevent you from paying if you may need to redraw and receive the charges again. Cash advance fees mean that the effective interest rate on cash advances is very high. If you were to get a $10,000 cash advance on a credit card, the usual fees are around 3%, being $300, and the interest on the advance is 22%. If that advance was paid back after one month, the fees and interest paid would be $483. The effective interest rate is a whopping 57.96%. The usurious rates charged by the banks cannot hide behind the smug smiles of their overpaid CEO’s.
91 years to pay
The real credit card horror story is that making the minimum payment on the card means the debt is unlikely to ever be paid off. When you’re 50, you could still pay for that trip to the US you took when you were 25, if you only make the minimum payment.
Real numbers: On a credit card debt of $37,809 making the minimum payment would take 91 years and 3 months to pay off the debt. The interest charged would be a massive $181,292.
Whats Next? Do it.
Many people in a debt crisis suffer form paralysis by analysis. They will read endlessly about what to do or just shut down. There are solutions. You can be debt free, you can get your life back, and you don’t need to file bankruptcy.