What is that flexible friend in your pocket or purse really costing you? Jon Halman finds out.
How many do you have – one, two… more? Well, the average is actually three. – And why not, it’s a boy’s or a girl’s best friend, isn’t it? No money in the bank, but that needn’t stop you getting that new suit/amazing dress you noticed last week…But before you flash that PIN, you may want to stop and think – using that flexible friend can seriously damage your wealth!
It’s so very easy to pay by credit card isn’t it? But have you noticed how much more difficult to settle those bills once they start to arrive? Probably you do what a lot of people do, and simply pay off the minimum every month. OK, the debt lasts that little bit longer, but it still gets paid off – and meanwhile you can carry on spending, right? Wrong! If you have a debt of £10,000 on the average credit card and are making only the minimum repayments, it can take you over 50 years to pay it off. – Yes, you did hear that right – 50 years! Might you perhaps want to think again about making that must-have purchase when you know you could be paying for it long after you have reached pensionable age?
That’s Shocking Credit Card Fact #1! Here’s Shocking Credit Card Fact #2. – How much money do you think the nice bank that gave you £10,000 actually lent to you? Well, £10,000, obviously! – Everyone knows that banks take money that someone has lent to them via a savings account, and then lend it on to you via your credit card or a personal loan. Wrong again! Because of something called fractional reserve lending (see The Great Bank Heist) the bank only needs to have 10% of the money that it lends. So if it has £1,000, it can lend you £10,000. Hang on, you might say, so if I lend the bank £10,000, I have to actually put in £10,000, but if my bank lends me £10,000 it only needs to put in £1,000. – It’s hardly fair, is it? In fact, some people might use stronger language. Your “friendly” bank has just put you into debt for the rest of your life – and all it has had to fork out to do it is a measly £1,000! See now why banks make billions of pounds in profits every year? (Except, of course, when they blow it all on executive bonuses and dodgy bets in the derivatives markets.)
Shocking Credit Card Fact #3. What is the actual interest rate the bank gets from the money it lends you? Well, it’s all there in the APR isn’t it? – The norm’s usually about 20% – extortionate enough, of course – but that’s the price of money these days. Except that the rate isn’t 20% – it isn’t even 50% or 100%. – Because of fractional reserve lending that we heard about earlier, the bank is getting more like a 4000% return! Does that make you angry? (Or perhaps make you think you might get a better deal from a dodgy loan shark on a street corner?)
So what can we do about these seductive bits of plastic and the smiling sharks in suits that peddle them? Cut them up, of course! – And file all those attractive offers that pour through your letter box in the shredder! But what if you have been using them? What if you are already looking at spending the next 50 years paying for those impulse buys that looked such a good idea at the time? Well, don’t fall for the ‘minimum payment’ scam. – If you pay back double your minimum payment, then you will clear the debt in 3-4 years, rather than it taking a lifetime.
The banks have already been picking your pocket for the whole of your working life – don’t let them carry on into your retirement!
For more information, please see: What Your Bank Won’t Tell You…And Really Doesn’t Want You To Know available as an ebook from nifty thrifter publishing for £2.97 (or approximately $5 US)
