Turbocharge Your Credit Card Repayments!
If you're fed up with being in debt, here's a simple way to reduce your interest bill without switching credit cards.
We Brits certainly love our credit cards. Indeed, according to the Bank of England, we owed £55 billion on credit cards at the end of 2006. What's more, we spend around £10 billion a month on our credit cards, according to banking payments association APACS.
One comparison that I often make is that credit cards are like razor blades. Used sensibly and correctly, they are an extremely useful tool. However, used recklessly, they can really hurt your finances and even become WMDs: Weapons of Money Destruction!
Of course, if you don't pay off your credit-card bill in full each and every month, you create a debt on which you'll pay interest, often at sky-high rates. Indeed, the typical credit card charges a yearly interest rate, known as an Annual Percentage Rate, of over 16% APR. Thus, if haven't taken advantage of 0% or low-rate balance transfers, then you could be paying interest of, say, 1.5%+ a month on your card balances.
As with all debts, the longer you take to repay your credit-card balance, the more interest you'll pay. Indeed, as I warned in The UK's Most Dangerous Credit Cards, it can take decades to pay off a debt of just £2,500 if you only pay minimum monthly repayments (MMRs). That's because MMRs barely reduce your debt at all, as they consist almost entirely of interest, with only a tiny amount subtracted from your debt.
For instance, let's say that you owe £2,500 on a credit card which charges a yearly interest rate of 19.56% APR (which equates to a nice, round 1.5% a month compounded). Paying only the minimum monthly repayment of 2.5% (minimum £5), it will take you over 26 years to repay this modest debt. In total, you pay £3,558 interest on top of your original debt of £2,500. Ouch!
Now let's play this game the smart way. Instead of paying an MMR of 2.5% which drops each month in line with your reducing balance, set up a direct debit or standing order for, say, a flat 3% of your balance. In this case, 3% of £2,500 is £75 a month, so we create a recurring monthly repayment for this sum.
Although switching from an MMR of 2.5% descending to a flat £75 a month won't have much impact on your monthly outgoings, it has an enormous impact on your credit-card balance. Indeed, instead of taking 313 months to repay your debt, the £75 monthly repayment kills it off in 47 months, or just short of four years. In total, you repay a total of £3,392, which consists of your original £2,500 plus interest of a mere £992.
Let's summarise those results again:
This table clearly demonstrates how one simple change effectively turbocharges your credit-card repayments, so join the smart set and ditch your MMRs right away!