CARD COST CHECKER
What does your credit card really cost you? Most of us haven’t a clue. APRs bamboozle us – though they are still the best way to compare one form of borrowing against another – minimum payments confuse us, and managing our cards to minimise the cost is probably something we never really consider.
Now, the card industry itself has come up with its own website http://www.cardcosts.org.uk to help us understand the real costs of the product it sells us. And suggests how to reduce that cost by a few simple changes.
To take the simplest thing. How long will it take to pay off your credit card debt?
People are always surprised by this one. If you pay the minimum fixed by the card company – usually 1% plus the interest (or £5 if that is more) – then a debt of £1000 will take you eighteen and a half years to repay and the interest will cost you more than the debt - £1265. That is at the fairly standard credit card APR of 18.9%. The reason it takes so long is that each month you pay 1% off the debt but as the debt reduces that 1% is less and less and debt reduces by less and less each month.
So the way to repay the debt more quickly is to fix the amount you pay. For example if you pay a fixed £25 a month your £1000 debt will disappear in a little over five years and cost you just £509 interest on top. A set of sliders lets you see how quickly your debt will go if you pay more than £25. To get rid of it in three years would need a payment of £36. And £92 a month would pay it off in a year.
These calculations all assume you stop using the card. If you carry on spending more than you repay then your debt will last forever.
The new website is very useful if you want to control your credit card debt. But you have to take that important step first! And the one practical thing the website does not advise you to do is ‘First, cut up your card’!
Credit cards can be a useful tool and a way to even out spending peaks and troughs. But always make sure you pay off a debt as soon as you can. Pay the card in full in months you can afford to And if you do get into real difficulty contact one of the debt charities www.stepchange.org or www.nationaldebtline.co.uk or your local Citizens Advice office.
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