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debt Effects of Credit Card Debt

Credit card debt it at an all time high and banks are charging clients shockingly high interest rates. The interest rate margin the banks make on credit cards is actually much higher than the premium. Is it any wonder that you keep on receiving all these wonderful offers in your post, almost begging you to take on more debt.

Credit cards are a common tool, a simple way to obtain goods or services. However, the only way to manage your credit card is to settle the full amount owed each month. But for those who will struggle to do this, it will become and easy way to run up more debt and drive them further into debt.

Credit card and even more so Store card interest are set at exorbitant rates for one reason alone, these companies make their money from the consumer’s inability to settle their card balances.

Credit card debt is unsecured, whereas other debt like your mortgage is secured (your home acts as security against your debt). With credit card debt, there is no backing security, which means that credit card debt is high risk for banks and hence the high interest rates

Credit Card Debt Trap Example

You have just spent R2500 on your credit card. When you receive your credit card statement you notice that the minimum payment required is 5%, in other words R125. You reckon, what a great deal – I’ve spend R2500, but only need to pay R125. Let’s go buy some more stuff.

Suppose your interest rate is 20% your interest for the first month will then be R42. If you do not pay the full balance, R42 will be added to what you owe. Remember interest is charged on your current balance, as well as further purchases.

Should you for a few months pay only the minimum payment required each month then you will be paying interest on interest.

If you spend R2500 per month from your first due date and only pay the minimum of 5% each month, you will owe your bank more than R16 000 at the end of the 6th month.

Credit cards are viewed as bad credit because it does not add any value. Conversely when paying interest on your mortgage for example, you know that you will be ‘compensated’ for the expense in the form of your home increasing in value over time.

In most cases credit cards are used to purchase consumables and this is a total waste of money. Bottomline, if you cannot afford to pay the full amount owed each month, you would probably be better off without a credit card.

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