Credit cards. We all know how expensive they can be, but many people find them very convenient. What people don’t know is how the card companies trick people into permanent debt. It isn’t simply a matter of people being irresponsible (although it has its part to play): credit card companies vary their terms, at will, to trick the poorest people into the most debt. Why? Because people in financial difficulty are the best source of money. If you pay off your card every month you are no use to the credit card company because they can’t charge you any interest or any delinquency fees. They make no money out of such customers. The best customers are people who pay the minimum payment every month, or, better, miss it sometimes and pay late fees, over limit fees, and more. This video, ‘The Secret History of the Credit Card’ (just under an hour long) from the US Public Broadcasting Service, explains how it works.

How long does it take to pay off a card? This calculator lets you work it out, but a couple of sample calculations are given below. They assume the minimum payment is 2% of your balance.

1) First, a basic example. You have £100 on your card and the interest rate is 14% APR. It’ll take you 23 months to pay back £100 if you only pay the required minimum of 2.00%. Over that period of time, you’ll pay an additional £13.05 in interest.If you could afford to pay an extra £10 a month towards your credit card debt, it would mean you’d repay it in 7 months and you’d save yourself £9.58 in interest. In fact, if you could afford an extra £25 a month, you’d repay it in 4 months and save £11.82. Not too scary perhaps.

2) Now, take the same figures as above, but you owe £1,000 instead. It’ll take you 236 months (that’s over 19 years) to pay back £1,000 if you only pay the required minimum of 2.00%. (maybe you think you won’t pay just the minimum for 19 years – but things can change. You lose your job, or get ill, have an accident… and suddenly minimum payments could be all that are possible, for a long time). Over the 19 years or so, you’ll pay an additional £1,123.41 in interest (in other words, you’re paying twice over for it). If you could afford to pay an extra £10 a month towards your credit card debt, it would mean you’d repay it in 68 months (just over 5 years) and you’d save yourself £763.10 in interest. In fact, if you could afford an extra £25 a month, you’d repay it in 34 months (just over 2 years), and save £943.84.

3) Suppose now the credit card company has given you a more typical APR of, say, 20% on your £1,000 outstanding credit. It’ll take you 483 months (that’s over 40 years) to pay back a mere £1,000 if you only pay the required minimum of 2.00%. Over that period of time, you’ll pay an additional £3,622.71 in interest (you’re paying over 3.5 times for whatever you spent the money on). If you could afford to pay an extra £10 a month towards your credit card debt, it would mean you’d repay it in 80 months (just over 6 years) and you’d save yourself £2,983.72 in interest. In fact, if you could afford an extra £25 a month, you’d repay it in 36 months (just over 3 years), and save £3,337.53.

4) APR 24%? It’ll take you 3780 months (that’s over 315 years) to pay back a measly £1,000 if you only pay the required minimum of 2.00%. Over that period of time, you’ll pay an additional £38,752.57 in interest!! If you could afford to pay an extra £10 a month towards your credit card debt, it would mean you’d repay it in 92 months (just over 7 years) and you’d save yourself £37,831.47 in interest. In fact, if you could afford an extra £25 a month, you’d repay it in 39 months (just over 3 years), and save £38,383.04.

5) If the APR is 25% or above, the debt is unpayable with the minimum payment as the interest adds more than the minimum payment to your debt each month!

The motto? Either don’t use credit cards at all, or if you must, then pay at least £10 more than the minimum payment, ALWAYS. Indeed, the recommended system for paying them off is to pay AT LEAST the minimum payment PLUS the interest charged each month. Count THAT as your ‘minimum payment’. If you can’t afford to pay all your cards like this, then pay off the one with the highest APR first. Then destroy it. Then pay off the one with the next highest APR, etc. It can be handy to set up a standing order for this ‘minimum payment’ (the one that includes the interest) and always pay this same amount – even though the interest will go down each month (other things being equal), if you can afford it, keep paying as much as that anyway until the card is history. But… what do you do if you can’t even afford to do this much? If you can’t even make the standard minimum payments? Well,  there are various official methods, of varying efficacy (voluntary arrangements, bankruptcy) but which are not really much use to many people, as is the way with official methods generally. I’m looking on the web for a better solution; I’ll put a link here if I find something.

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