13
November
2018

Credit Cards

The Dangers of Credit Cards

Credit cards are the easiest way for people (especially young people), to get themselves into financial difficulty. It is easy to obtain credit, it is easy to use the credit and the interest rates are horrific.  It is simple to put yourself into a position that makes recovery difficult.

Many people don’t even consciously decide to get a credit card. They often come with the loan or account they have set up and, at some point, they just start using it.

Others obtain a credit card with good intentions. A popular strategy is leaving all your income in an offset account to reduce your home loan interest cost whilst paying everything with credit card (the intent being to pay off the card before any interest is accrued).  If you manage to stick to this strategy - it will work. The problem is that, many don’t pay off the credit card bill each month and, before they know it, they have a hefty credit card debt.

I hear of people obtaining a credit card so they can accumulate points or, only use it to buy stuff online, both with the intent of paying off the debt during the interest-free period. Again, despite good intentions, the debt doesn’t get paid during the interest-free period and a credit card problem develops.

The interest rates on credit cards are huge (most are around 20%), so even with a relatively low debt, the interest costs can be very high. This is exacerbated by the fact that there is no pressure to bring this debt down with no loan term in place. Quite the reverse, the banks are happy to keep the debt levels steady.

 The minimum monthly repayments are generally set at 2% of the balance.  Given the high interest rates, this barely covers the interest costs.   On a $2,000 debt, the minimum repayment is $40, and, assuming the interest rate is 20%, the interest costs are $33.33. Barely any principal is being repaid. You can also add more debt on top of this by continuing to use the card.

If you want to get rid of this debt, you need to make a conscious decision to do so. Consolidating to a debt arrangement with lower interest and a finite loan period is often a good strategy. This may not be possible for some people, in that case, it is necessary to implement your own payment plan that will reduce this debt, not just cover the interest cost.

If you do consolidate into a new debt arrangement, it is very important that you do not repeat the same mistakes and accrue more credit card debt that needs to be dealt with in the future.

I think it is best to beat this problem up front. Avoid credit cards in the first place.

Author; Alex McKenzie Categories: Future Financial Services Blog

About the Author

Alex McKenzie

Alex McKenzie

Owner at Future Financial Services

Past:

  • Paraplanner at Zammit Partners Investments
  • Unit Trust Administrator at Colonial First State

Education

  • University of Western Sydney
  • Penrith High

About

As a Financial Planner I help people to achieve what they would like in life. This involves helping you to identify the things in life they would like , developing plans to help achieve them and strategies to protect what you already have. We do this by providing Financial Advice to guide you through your life stages.

The financial planning process involves determining a clients current situation and financial objectives and tailoring strategies to assist in best achieving those objectives.

I am an expert in superannuation, investments and insurance, these are tools we use to help you achieve your goals.

I aim to use my knowledge of superannuation, taxation and Centrelink to efficiently use your assets and income to achieve your financial goals.

Retirement and pre-retirement planning, wealth creation, asset protection, insurance planning and estate planning are all areas of advice that I provide.

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