Pete is never sure why his personal finances are in such a muddle. He tries hard to keep his spending under control and pays the minimum amount on his credit card each month without fail. However, his debts seem to be rising, and he feels as though he is running fast and not getting anywhere. Worse, sometimes he feels he is running flat out and actually going backwards, - like trying to run up a fast-moving elevator. Sounds familiar?
So, what is the ONE thing you (and Pete) can do to get back on top of your financial situation? The answer is easy (if a bit boring). Pay off your credit card debt! Paying the minimum each month, rather than clearing the debt is the quickest route to financial disaster.
There is no point have a saving account with a few thousand in it if you are paying the minimum monthly payment each month on a credit card debt of £3,000. The average credit card debt is the UK is around £2,500, which means that a lot of people have more than that.
Although it easy to forget about your credit card debt if you are paying the minimum each month, because it lulls you into a false sense of security, however, it is essential to tackle it head on. Making minimum payments feels as though you are on top of the situation, but the reality is very different. You are paying very dearly for your credit card debt and it can hang around for a long, long time.
Let’s take Pete’s situation as an example:
Pete is paying 17.9% APR (this is a fairly usual rate) on his credit card debts.
He owes £3,000.
He opts to pay the minimum monthly amount, which is usually 1% of the balance. In this case, he pays £71.50 per month.
Now - and here is the catch – Pete starts to pay LESS each month as the minimum payment decreases, which makes him think he is paying the debt down. However, this is not the reality and means the debt can last for YEARS. If he continues to make the minimum payment, even if he didn’t spend another penny on the card, it would take 27 YEARS to pay back the debt. Plus, he would be paying a total of £4,000 in interest.
The only people who are gaining from this situation are the banks. The most important action you can take it to try and pay off your credit card debt as quickly as possible if you don’t want to be stuck with it for years, sucking away at your finances like some sort of fiscal vampire.
If Pete committed to paying £80 per month, he would pay off the debt in 4.5 years, paying around £1,250 in interest. If he could pay £120 per month, he would be debt free in two years seven months and only have paid £700 in interest.
There are those who can cleverly transfer their credit card balances regularly onto 0% interest deals, but you really need to be on top of it to make this work. For the average person, like Pete, the best plan is to increase your monthly payments, set up a Direct Debit mandate for the fixed amount and sit back and wait to be debt free!