The developed world's population is indebted to a level never seen before, with the majority of people owing money to banks and other financial institutions. Mortgages and home loans account for a large part of this record debt - after all, with the recently ended surge in property prices, how on earth could the average person ever afford to buy without getting deeply into debt?
Bank account overdrafts and personal loans also form part of the debt mountain, but one of the most common forms of unsecured debt is that owed on credit cards. Unfortunately, given the widespread nature of credit cards, this type of debt has particular problems which make it one of the most difficult to deal with.
Firstly, for most people the interest on a credit card is pretty high by the standards of many other kinds of finance. Of course, you'll see advertisements for cards offering less than 10% APR, but these are aimed at the financial elite, and most of us are paying rather more than that. This alone means that credit cards should be seen as a priority debt to clear, as a lot of your repayments are swallowed up in interest.
Another problem with card debt is that there's no fixed repayment period after which your debt will be cleared. You keep spending however long you want so long as you make your minimum monthly repayments and stay within your credit limit. This means that the debt will be with you potentially for the rest of your life, unlike say a mortgage which has a fixed repayment schedule and a date when payments will stop.
Perhaps the most dangerous aspect of borrowing on a card though is the concept of the minimum repayment. Back in the early days of credit cards, this figure was typically 5% of your balance, and making this payment actually did reduce what you owed by an appreciable amount. Over time, the minimum repayment figure has drifted steadily downwards, with 2% of the balance now being common.
This might seem desirable, as your monthly outgoings will be less, but the problem is that a 2% payment is barely enough to cover the interest charges incurred that month, and your actual balance is more or less untouched. This means that you're effectively treading water, paying just a little more each month than what you're being charged - and sticking to this schedule will mean your debt takes much, much longer to be cleared and cost you thousands more in interest.
The best advice then is to concentrate all your debt repayment fire power on your most expensive cards, paying as much off as you can each month, and avoid sticking to the minimum payment amount. Even a little extra on top of that each month can make a dramatic difference to the overall cost of your credit card debt.
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