Credit Cards: An Unnecessary Evil?

Why are we in debt?  

Why are a large majority of all people in the UK living beyond their means?  Why are two thirds of all Europe’s credit card debt held here in the UK? 

We all have debt, this seems to be the nature of life, but why is it that our spending often exceeds what we can afford?

The answer is simple; the credit card companies allow it, this is what they want and this is how the banks and other lenders make huge profits.  The real truth is they actually want us to fall behind with our payments.

Everybody likes to get paid on time, but your creditors actually prefer the opposite.  They want you to be late!

It’s true they don’t want you to be too late or stop paying all together, but a week or two is just the excuse they want.  What does a late payment mean to them?  You are still paying, but you are a week or two late.  Their late fee is £30.  They just made £30 for doing nothing.  You are already up to the limit on your credit card, so this fee puts you over your credit limit.  This earns them another £30 for, again, doing nothing.

You now find the money to make your minimum payment of £20.  The figures do not work in your favour.  Let’s say that you have £15 in interest for the month.  Your total costs are; £15 in interest + £30 late fee + £30 over limit fee = £75 charged to your account.  You pay £20, which leaves you £55 worse off than when you started and you have nothing to show for it, and to add insult to injury you are still over your limit so next month you will get interest and charges on the interest and charges, great for the creditor but not so good for you.

This is why credit cards are evil and we must learn to do without them!

The first step in this process is to find a way of not using your credit cards. One method I have seen is to take a black permanent marker and write the word DEBT on the front of the card. Now this doesn’t stop you using it but it may make you think twice before you flash the plastic.

Alternatively, gather up all of your credit cards and destroy them.  You can save one or two, but get rid of the rest.  Pick the ones with the lowest interest rates and preferably no annual fee.  Store your select few in a safe place that is not easily accessible.

This may seem extreme, but most people do not have the will power to simply stop using their cards.  They look at their statement, see £200 or £300 in available credit and look at it as free money.  Remember there is no such thing as free money.

If you can’t bring yourself to cutting up your cards, at least get them together and store them somewhere that would take you some effort to get to.  A safe deposit box is always a good idea.  You can also have someone that you trust hold on to them or hide them.

The key is to not have them accessible for those impulse purchases which present themselves every day.  Once the impulse has passed, the chances are that we will realize that we don’t need to make that purchase or we will probably forget about it all together.  You are now even closer to getting out of debt.

Don’t forget to cancel the cards you are no longer going to use.  Many credit cards have an annual fee.  This is wasted money that you can use to pay off your debts.  

The most startling thing is the way creditors make money from the misery of bad debt. Money lenders are by nature cautious people and in the case of loans and credit cards they have a sophisticated way of making sure they make a healthy profit from bad debt.

Imagine this; you have taken out a credit card and things went nicely at first, but as time went on you have to rely on your credit card more and more. In the end your card is up to its limit and then things still got worse, to the point where you stop making payments.

The creditor will start to add interest and charges to your account until the amount owed looks nothing like the amount you actually spent, does this sound familiar?

At some point they will send you a default notice. This is a formal acceptance that in their opinion you are not going to pay them and they are making on final demand for you to bring your account into good order.

Once the default notice has been served a new chain of events begin. Because the creditors are so cautious they have insured themselves against loss and it is at this point they will make a claim against their insurance which will see a payout of 40% on the account.

The creditor will now sell the debt to a debt collection agent for a further 10% who will start sending you threatening letter. They are usually on a time scale so if they are unable to collect any money from you they will return it to the original creditor who will then sell it to a firm of solicitors for a further 10%.

I am sure in recent month you have heard the news that banks have made a “write down” on their bad debt book and perhaps you have wondered what it means? In short they have added your debt into their accounting procedure and will now get relief in the tax on their profit which will be 40%.

So lets do our own final account of what the creditors have done

Insurance 40%

Debt collector 10%

Solicitor 10%

Tax break 40%

Total 100%

Amazing isn’t it? Your creditor has got their money back in full. Now imagine that you have got into a repayment programme like Debt Management or an Individual Voluntary Arrangement. Your creditor will be in clear profit by hundreds if not thousands of pounds.

Now that you know the evil of the credit card and how the creditors are making huge profits from your misery you should be able to put the temptation out of the way and you can start paying them off.  Just remember to pay at least the minimum monthly payment, pay all accounts on time, and stop using credit. Now step back and enjoy the road to financial freedom.

3 Secrets That Will Save You Money on Your Debts

While extremely convenient, credit cards can be a very costly in the long run. Most people don’t realize just how expensive paying for things on your Credit Card can be. Each year many credit card users can pour hundreds or even thousands of pounds down the drain using credit cards. Even if you’re not a big credit card spender, almost anyone can save hundreds of pounds each year with these 3 credit card secrets.

1.  Never Pay the Minimum Payment
The credit card company always makes it clear exactly what your  minimum payment is. Even if you owe thousands of pounds, your minimum payment can seem surprisingly low, often as low as 3% of your total debt. However, what the credit card companies don’t tell you is that if you only pay the minimum payment for the next 5 to7 years you will only be meeting the cost of the interest costs alone. In fact, that purchase you made for just £50 will, over time, cost you £100. To avoid paying high interest charges always pay more than just the minimum payment.

2.  Transfer Your Balance to a Lower Interest Credit Card
Before the credit crunch most people in the UK become used to being offered credit on a regular basis. Many of the creditors made some introductory offer, some had very enticing interest rates. Many credit card offers allowed you to transfer your existing high interest rate credit card for free to the new card with either a zero percent interest rate for a number of months or a very low interest rate for a specific period of time.

If you have a balance on which you pay hundreds of pounds each year in interest, it is often in your best interest to accept these offers and enjoy zero or low interest for the next 6 months to a year.

3.  Use a Debit Card Instead of a Credit Card
It’s no surprise that often we use credit cards out of habit. But why use something that is so expensive when you don’t need to?. We can easily pay for your meal or fill up our car with fuel with your debit card and not pay any interest. Debit cards are just as convenient as credit cards and usually accepted everywhere a credit card is accepted. Use your debit card to avoid high interest fees in the long run and you can literally save hundreds of pounds in interest charges each year.

If you don’t have a debit card why not use a pre paid debit card, although these cards typically charge a fee you can often choose to pay a per transaction fee or a monthly charge. It is well worth shopping around to find the cheapest option. Even with their fees pre paid debit cards are usually considerably cheaper that credit card interest rates.

IVA Watchdog

2 Landsdowne Crescent

Bournemouth

Dorset

BH1 1SA

01202 636070