Credit has never been so easy to obtain.
Every day we’re bombarded with deals: interest-free credit card balance transfers, interest-free financing for home furnishings, big-screen TVs and appliances, and low rates on a new car.
It’s no accident that just after Christmas, your friendly bank starts peppering the media with offers of interest-free periods on balance transfers. This is a time of crisis for many people. The cards have run out for a good Christmas and the debt hangover is just starting to hit. The first post-Christmas payments are coming up and there is no cash to pay them.
The interest-free credit card balance transfer option sounds like a godsend and is enthusiastically embraced, but all you’re doing is kicking stinking debt further down the road of reckoning. When it comes time to start paying interest at rates between 19 and 21%, there is still no cash and the debt increases as you get more cards and shuffle the debt.
The debt deck
Debt shuffling involves getting cash advances against remaining balances to make minimum payments on other cards and for other monthly payments. This is where fees and charges accelerate. High fees apply to get the cash advance and interest rates kick in immediately at 21% or higher calculated daily.
Effective Rates above 50% on cash advances
Fees and charges on cash advances prevent you from paying if you may need to redraw and be charged again. Cash advance fees mean that the effective interest rate on cash advances is very high. If you were to get a $10,000 cash advance on a credit card, the usual fees are around 3%, being $300, and the interest on the advance is 22%. If that advance was repaid after one month, the fees and interest paid would be $483. The effective interest rate is a whopping 57.96%. The usurious rates charged by the banks cannot hide behind the smug smiles of their overpaid CEOs.
91 years to pay
The real credit card horror story is that making the minimum payment on the card means the debt is unlikely to ever be paid off. When you’re 50, you could still pay for that trip to the US you took when you were 25, if you only make the minimum payment.
Real numbers: On a credit card debt of $37,809, making the minimum payment would take 91 years and 3 months to pay off the debt. The interest charged would be a massive $181,292.
Whats Next? Just do it.
Many people in a debt crisis suffer from analysis paralysis. They will read endlessly about what to do or just shut down. There are solutions. You can be debt free, you can get your life back, and you don’t need to file for bankruptcy.
