Testing Your Debt

Credit cards are dangerous for most people because of the unsecured debt it makes. You are always going to be libel for the amount you place on your credit card and one can quickly become in debt when you use them. In fact credit cards are said to be the most expensive way for anyone to borrow, especially if there is an outstanding debt month after month. You will find that will credit cards there is interest charged on the outstanding balance, even with store cards. This is why when you are testing your debt, and trying to help get yourself on financially solid ground you should not leave any balance on your credit cards. The interest charged on credit card balances is usually very high, even for those that are not store cards.

Analysts and consumer reporting agencies feel that you should consider a personal loan through a bank or other lender rather than going for the credit cards method as you can usually find a cheaper interest rate. When you are trying to get a better deal it is important that you shop around. You should always realize how much time you need to pay back the loan to establish a better payment and interest rate. For loans you should check the APR, extra charges, and of course the terms and conditions to make sure you are finding the best loan. Credit card and store cards can be useful, which is why many of us end up having at least one. They allow us to buy goods when we need them and then at least 59 days to pay for the goods. It will depend on the timing of the purchase though. What you may want to do regarding the payment to credit cards is leave the money in the bank until the last possible moment so that it can be earning you interest.

There is a cost to making minimum payments as well. You should pay off the balance of your credit card every month. Therefore you should budget for the amount you are going to use, and save that money somewhere to help you get the balance paid off. You will find if you don’t pay off the balance your debt to the credit card or store card is actually going to increase. The balance is going to be charged interest every time you don’t pay it off. This means the amount you owe will increase, and the payments you are making account for partial interest instead of the balance. In other words if you pay only the minimum balance each month your debt, by using the card, is going to cost you more than you originally borrowed. Even if you make more than the minimum payment you are better off debt wise than just paying a very small amount, which tends to go towards the interest only.

We have an example for a credit card situation that is very important to look at. First the example has a card where you have not made an additional purchases and the interest rate isn’t going to vary during the time period. You have an outstanding balance on your credit card of 1000 pounds and the interest rate is 25.9% a year. You have only been paying the minimum balance each month. The credit card states the minimum is 3% of the balance or 5 pounds depending on what is greater. This means you will be paying 30 pounds for the minimum payment. However each month as you continue not to pay the balance you are being charged the interest rate, which adds on about 20 pounds per month to the balance. So you are only paying 10 pounds to the actual credit card balance and the other portion of the payment is just interest. If you were to calculate how many years it would take to pay the card off based on 30 pounds a month with the 25.9% interest rate you would find it would take you 18 years to pay the card off and you would have spent 2500 pounds, which is more than half of the original amount.

So I bet you are considering the damage a credit card can do to your debt ratio. There are some things to consider before taking out a credit card. First there are several credit cards on the market that offer special deals, such as 0% interest for new users for a specific period of time. You will find that you must pay close attention to the terms and conditions in this case. Ask questions such as: does the special deal apply only to the balances you transfer from other cards or does it apply to purchases? What interest rate will you be charged after the introductory period ends? Also, is there a fee for transferring balances from other cards, and what is it? Most often you will find that the balance transfer deal lasts longer than the purchase 0% APR if the deal is tandem. You will find that the balance transfers with 0% interest will allow for the minimum payment to go towards the balance for as long as the introduction lasts. After that time you should either pay off the card or increase your payments to avoid the interest. The same goes for the introductory APR on purchases. You want to make sure the entire balance will be paid off before you are charged interest, or to increase the payments once the period has ended. You will also find most cards charge between 2.5% and 3% for balance transfers even during the introductory period.

One last thing to be worried about is the late payment charges and exceeding your limit. You need to know the penalties for these. If you are late or miss a payment you will be charged a fee, no matter the balance on the card. Even for 5 pounds you will be charged a fee. Usually it is 20 to 25 pounds, which adds to what you owe.