Your Credit Card is Really a Debit Card!
In today's world where we crave instant gratitude on social media, courtesy of likes on Facebook and retweets on Twitter, when it comes to our bucket list, we want it now, rather than living by the old principle of ‘save up for a rainy day.'
It makes you wonder, what would people do without their credit card, almost being as important as the mobile phone. Unless you happen to be one of the ten million unfortunate souls, unable to acquire a credit card or loan from the major financial institutions, credit has never seemed easier.
The term credit card is very much dubious and in my humble opinion erroneous, as the moment you use your new faithful friend, nestling in your purse or wallet, this piece of plastic has suddenly taken on the form of a debt card and you are very much on the slippery slope!
You may get the impression that I am preaching to you as the purveyor of great wisdom and a wise sage who has never strayed on the wild side of credit card debt. Far from it, as I like many have learned very much the hard way, having succumbed many a time to the temptation of instant gratitude and joy, with the issue of how to clear my debt consigned to the future.
With reduced income due to life's challenges, I was forced to confront my debt head-on as the banks and credit card companies do not find low earners on the wrong side of half a century years on this planet an appealing proposition. Young people who are fortunate to be earning a high income, can afford to be both arrogant and reckless in their cavalier approach to finances, but mark my words, there is a strong chance that father time and incurring debt will catch up with these foolhardy beings in the end, during these uncertain times, fuelled by the Brexit issue.
I was primarily inspired to write this article when I received my latest credit card statement, with the adrenalin rush associated with my latest foolish and unnecessary purchase having long since worn thin. Analysing my credit card statement brings the reality of this form of spending home to roost. When you buy that Ted Baker suit, treat your trophy wife to that stunning dress from Reiss or the latest 4K ultra HD Panasonic television, paying £200 or £500 with your trusted plastic friend seems so easy and pain-free. Next time, to bring a sense of reality to proceedings, try paying for your latest fix or fad purchase with cash!
So let's return to that painful process of analysing your credit card statement. My HSBC Visa credit card has a reasonably competitive annual percentage rate of interest (APR) of 22.9%. Even with this level of interest, you're up against it when it comes to clearing your debt, but I cannot for one minute fathom how anyone can hope to be free of debt when dealing with the astronomical APR rates of up to 700% charged by the dubious payday lenders. It is difficult to comprehend how the Government of a supposedly civilized and progressive nation allow these scrupulous lenders to operate on the right side of the law!
On my credit card, although having reduced my debt in recent times and exerted some discipline in trying to keep my debt card firmly in my wallet, the stark truth is that I am indebted to HSBC to the tune of £1,400. Like many, I have taken seemingly the easy option and made the foolish decision to pay back somewhere around the minimum amount allowed each month. In my case, this equates to the princely sum of £35. All well and good you may think, but closer inspection reveals the folly of my ill-advised approach. Somewhere on your statement, not entirely obvious at first glance, it states that the interest charged equates to a rather deflating £23. What this means in reality, is that of the £35 paid by yours truly, only £12 of the £35 is actually used to reduce the amount of debt.
Although not entirely true, as your debt will be slowly reducing, in effect £276 will be paid on interest alone over a year, with only £144 reduction in your debt. The simple truth is that at this pathetic rate, it’s going to take you a very long time to pay off your debt. Not to mention the fact that while that credit card is nestled in your wallet, there is always a temptation to whip it out when you next visit your local high street, in order to attain instant gratification and that feel-good factor.
Having deliberated long enough over the lack of wisdom hitherto, in incurring this debt in the first place, the most pressing issue at this juncture is, how do we take small steps towards relieving yourself of this self-inflicted nightmare?
Well, the first step is to take out your credit card from your wallet and place it in a drawer in your sideboard. I've heard it said by the more ruthless advisors, that you should cut up your credit card and throw it away or, somewhat a rather different idea is to place your credit card in a container of water and place it in the freezer! In this way, should the spending urge grab you, while surfing the net, hopefully in the time it takes for the ice to melt, the foolish urge to incur further debt will have passed? Personally I would advise the first course of action, as sometimes, unfortunately for some families, they are forced to turn to their credit card, in order to make an emergency purchase, such as a washing machine. But I stress that this should very much be the last option and that you should be totally committed to clearing your debt as soon as possible.
With these emergency and unexpected costs in mind, it is important to stress, that once you've paid off your debts, complacency should be very much guarded against. You may find that at the end of the month, you now have some cash left over for some treats. All well and good to some extent, as rewarding yourself for discipline and attaining your goals are often recommended. However, do bear in mind that you never know when an emergency or unexpected expense might arise. Therefore start getting into the habit of saving regularly, on a monthly basis, for a rainy day. In this way, think of the relief and joy you will feel, when faced with an unexpected bill, given that you can pay cash or by cheque, using money from your savings account.
In my particular case, I happened to have some money saved in a separate account which is sufficient to clear my credit card debt. As silly as it may sound, I like many, find myself guilty of laziness and being disorganised. The truth is, as strange as it may sound, I hated to think that my savings would disappear in a flash, paying off a debt incurred by foolish and reckless spending.
However, you have to be logical and bite the bullet, as in the long term it makes perfect sense. As I alluded to earlier, with my current approach, I am wasting around £300 on interest payments, the equivalent of burning this amount of money, with my overall debt only reducing by the paltry sum of £12 each month.
So finally, I have decided to take the plunge and use my savings to clear my credit card debt. Any financial adviser worth his salt will tell you that the first course of action on the road to redemption is to use any savings you have to clear your debts. The golden rule being, that unless your savings are earning higher interest than that being charged by your credit card company for the debt you've incurred, you should use it immediately to clear your debt. In my case, it was as they say, ‘a no brainer', as my instant savings account was paying a miserly 1% interest, while the credit card debt was charged at a whopping 23%.
Therefore in order to conclude this latest simple economics lesson, having taken the painful step of emptying my savings account to pay off my foolish debt, I have lessened the psychological blow in the following manner. The money I used to pay to the credit card debt each month and, do bear in mind that two-thirds of this money was in effect being burnt each month, will now be paid into my savings account, in order to pay back Paul as it were. Being the generous soul that I am, I have decided to pay £50 each month into my savings account, with the comforting thought that in a year's time, I will have £600 nestled away for a rainy day!
Is it any wonder that those bankers in the city are earning huge bonuses, courtesy of our ignorance when it comes to good old fashioned economic sense!
Aled Evans
