Your Credit Card Explained
When you applied for your first credit card you were probably offered a card with a £500 credit limit. Over time you found that your card provider increased your credit card limit many times. Often they increased your card without asking if you wanted an increase. After many years of using your credit card you start to see the amount you owe them creep up due to shopping, holidays, overspending, emergencies, treats, etc.
In many cases the monthly interest payment and the payment protection insurance charges meant that you were not paying much off your balance. If you only ever paid the minimum amount off your credit card debt each month then you probably noticed that your credit card balance did not reduce much.
Credit Card Repayment Calculator
Over the past twenty years we have seen credit card companies reduce the minimum monthly repayment from 5% in the 1970’s to 2% today. This has made borrowing money on your credit card more expensive as it takes you longer to repay the debt. At the same time your monthly payments have become more affordable as your monthly payments have reduced. Unbelievable!
Most people find their monthly repayments affordable as they are now paying less for the same debt than they did twenty years ago. For example £1,000 paid back at the minimum monthly repayment of 5% per month was £50 per month; whereas the minimum monthly repayment of 2% per month is £20 per month.
Below are two scenarios to explain how much interest you will pay back at 5% and 2% of the outstanding balance and how long it would take to pay back £1,000. We assume you never used the credit card until the balance is cleared.
- If you borrowed the same £1,000 and paid it back at the minimum monthly repayments of 5% of the balance outstanding. It would have taken you just over 6 years to pay off the original amount borrowed and it would have cost you £269.35 in interest, assuming you never used the credit card again.
- If you spent £1,000 on your credit card and paid it back at the minimum monthly repayment of 2% of the balance outstanding, it would take over 19 years to completely pay off the original amount borrowed, assuming you never used the credit card again. You would have paid £1,122.80 in interest over the term.
Over the last twenty years we have become more affluent and our lifestyles have improved beyond belief. Credit card providers have increased credit card balances often without agreement and cardholders have accepted this extra borrowing often without question from their trusted flexible friend the credit card!
Who Is Responsible For Our Credit Card Debt?
Whenever we reach our credit limit the companies increase our limits. Then one day we discover that we are in debt to the creditcard company for say £18,000. The question we should be asking is: Are the credit card companies responsible for the amount of credit card debt people have or should the credit cardholder have been more responsible in the way we used our credit cards?
After all credit cards are woven into the very fabric of our lives, finances and society and many of us no longer carry much cash. We pay for everything with our credit cards and there is nothing that we cannot buy with a credit card. We use credit cards as though we have earned the money and it is in our bank accounts to pay for our purchases.
The Quick Fix For Credit Card Debt
Over the past twenty years homeowners have found it easier to consolidate their credit cards and loans within their mortgages as a way of reducing their credit card debts to their credit card providers. Most people do not realise that they are increasing the cost of their debt by extending the repayments of their credit card debt over the term of their mortgage.
This has become possible due to the increase in property values, increase in earnings and the relative ease of borrowing money. The day of reckoning has been coming for a while and now most people have unbelievable amounts of debt.
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