Credit Cards - The Plastic Peril
With Christmas fast approaching the temptation to use your credit card(s) becomes more and more powerful. But next time you are tempted, make sure you appreciate the cost of what you are actually doing.
Consider James. He’s just seen the Samsung Smart 4k 49inch LED TV and, despite his wife’s observation that their current TV works perfectly well, he’s tempted to buy it. His reasons are selfless - he believes that his wife deserves to watch the Christmas Strictly Come Dancing Special with perfect visual and audio clarity.
James doesn’t have the £700 needed to buy the TV at the moment and is considering paying for it using his credit card. He’s not the fastest at clearing his card debts and often will just pay the minimum payment every month.
Assuming a standard APR of 18.9%, if James just pays off the minimum amount every month, it would take him about 15½ years to pay this off. During that time he would have paid £828 in interest, meaning that his £700 TV ended up costing him £1,528.
Credit card debt is again on the rise and although the Bank of England base rate is at an historic low, lenders have not seen fit to reduce the interest they charge their customers for using credit.
Budgeting for big ticket purchases and only spending what you can afford is the most prudent route, but when using credit, try and stick to the following rules;
Shop around, search out the lowest APR available or consider a bank loan, which can often have much lower interest charges.
Plan how you are going to pay off the card.
Don’t just pay off the minimum every month. If James had set aside a fixed repayment amount of £50 per month, he would have cleared his card in just under 1½ years and the total cost of the TV, including interest, would have been £788.
Set up a direct debit. Guard against forgetting to make the monthly payment, because if you miss a payment it will have a negative effect on your credit score and may even prevent or hinder you borrowing at a later date.
If you have existing cards, consider switching cards to another provider to benefit from an “interest free period”, but be mindful of transfer fees!
Just because credit is widely available, it doesn’t make it a good idea. If you must borrow, do so over the shortest period you can afford. Better still, wait until you can pay cash. That’s a much more satisfying feeling!
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