Sunday, March 27, 2011

How to repay credit cards

Yup, this has nothing to do with writing. And isn't spam :-)

Do you have maxed out credit cards which you repay at the minimum amount every month? Me too.

Or rather I did but then I thought of some very obvious facts:

First: If you have a maxed out credit card you stop using it, right? Which means that you are able to survive without the credit card. You may as well not have it, it has no money on it so you can't use it. Obvious.

Second: But you are servicing that credit card every month (hopefully). You are repaying the maximum amount you can on the credit card - and surviving. That means that you can survive while paying out that amount of money every month. Obvious.

Do you have any idea how long it takes to pay off a credit card at minimum rate, assuming you never took anything else out of it? If it's £5000 that would be at least 20 years. And you'd pay vastly more than £5,000 with the interest charges.

Okay everybody knows credit cards are bad. They are the bread and butter (and the champagne) of the banking world - who love people who pay the minimum. So why play that game?

Let's just reiterate those points: (1) You can survive without the card, because you already have to; (2) You can pay off the minimum amount every month because you already do.

So, stop paying the minimum amount and pay a fixed rate at the current minimum.

Let's say you have to pay £200 per month into your credit card as the minimum. Well pay £200 every month, fixed rate. Even when the minimum per month starts to go down, keep paying the £200. Why? Because you'll pay it off much faster, you'll be no worse off and you'll pay far less in interest.

Now if you, like me, have multiple maxed out credit cards this gets even better. Let's say I have to pay £150/ month on one and £200/month on another. Once I've paid off the one with £150 I transfer that £150 to the other one.

I'm still no worse off but now the second card is getting paid off at £350/month. So it gets paid off even faster.

Yes, of course, it takes discipline. If you're the sort of person who just has to spend money if it's available this won't help you; you'll just have to go on suffering and continuing to pay bankers to keep them in the lifestyle to which they are accustomed.

Personally I'd rather have the money for myself because once you've paid off those cards, and any other debts, it's all for you.


What's on the turntable? "Die Mensch Maschine" by Kraftwerk from "Minimum-Maximum"

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