Part 8: (Credit Card Debt)
Credit cards have come a long way; almost every bank offers one, they generate unbelievable amounts of profit, make internet shopping possible, and they're the very basis for the creation of cashless societies.
So what's wrong with them?
Well, the fact that credit cards, when not in the right hands, can turn into something similar to a full scale train-wreck at high speed. That keeps going, and going, and going...
Their concept is very simple; you get a card with a credit limit (let's say 500BD). You can use that card to buy things upto that limit. So lets say you buy a sofa for 200, which means you have 300 more dinars you can use to spend on that card. Normally, you can't exceed the limit, and would have to pay back some of the debt to be able to use it again. Any amount not paid off at the end of each month, you have to pay interest on, which is deducted from your limit.
Interest rates seem pretty attractive as well! Some banks post rates of 2%, while others post rates of 1.8% or close to that. When you compare it to loan annual interest rates, of 8%, 9% or more, they look pretty damn attractive right?
The credit card interest rate is per MONTH. Calculate that and you're actually looking at something closer to 20-25%. Now, that's a LOT. If you had debt going at that rate, it would double every 3 years.
Anyhow; the way credit cards go, they give you the very attractive option of paying a minimum of 5% or so (depending on the bank). It seems attractive because you're not paying a lot - on 200 dinar new TV, you end up only paying 10 dinars.
It's a very clever system; you think you're paying off your debt with a small amount, and pay the minimum. However, remember the 2% interest? You pay 10 dinars, so your debt is down to 190. Then interest creeps up, and you get hit with around BD4 of interest, so essentially you've only paid BD6 off your debt (i'm rounding up figures). It keeps going and you end up paying huge sums in interest over a LONG period of time.
Then there's also the high charges if you forget to pay your monthly bill on time, as well as your card insurance fees, annual fees, or whatever else fees. All tiny small costs that add up to form a giant monster that feeds on your salary.
The other thing with credit cards is, if you have them in your wallet, thats incentive enough to spend money on something you don't really need. You see something in a shop; thats a nice TV, thats a cool phone etc, and then you end up with more and more debt.
Using credit cards reasonably needs a lot of self-constraint; a lot of people use them for impulse buys, etc. Again, small purchases here, small purchases there, they all add up. Don't carry them around with you - leave them at home otherwise you'll probably end up using them if you see something you like. If you need to use them for something like shopping online, use them, and pay them off immediately (its best not to get lugged with interest and late payment charges). Don't consider them as extra cash you have; leave them for emergencies and travel.
Even then, anytime you do use them, make sure to pay them off as soon as possible; credit card debt adds up QUICK if you leave it to grow; definately more serious than loans.
Another thing is, many banks offer you unbelievably high credit limits; your salary might be 500BD, and they decide to offer you a 2000 dinar limit. Don't go for it. If you want to take out a card, the best thing is to try and keep the limit somewhere at around half your salary. If you go overboard and spend it all, your still not in a very dangerous spot, and can afford to pay it off without much difficulty.
I guess thats a good basic intro to credit cards; just be careful and use them wisely :)
29 July 2007
Part 8: (Credit Card Debt)