Monday, April 06, 2009

Money down the toilet


I pay my credit card in full every month, and I usually pay online, so I don't tend to look at the paper statements and assorted literature I get sent by the bank, nor am I familiar with the various tactics banks use to make an extra bob or two.

Today I came across my latest credit card statement as I was sorting through a pile of post. On one of the three bits of paper it comes in (who cares for the rainforest, eh?), I saw little blurb titled Minimum Payments and started reading.

If you make only the minimum payment each month, it will take you longer and cost you more to clear your balance.

Yep. This makes perfect sense. So far so good.

If the account is not fully cleared, interest will be charged on the total value of the statement and not just on the outstanding balance.

What?!! So this in essence means that if, say, in January you spent £800 on your credit card, but when the bill came you paid £500, then in the February statement you'd be charged interest on the full £800 for the month of January - although you paid £500 before the payment due date. If in February you pay off another £200, in the March statement you'll still be charged interest on £500 plus any interest you accrued in January.

Am I the only person who thought that the advertised "up to 56 days' free credit" applied whether you paid your balance in full or not? Because, as I understand it, unless you pay the total balance at the end of the month, you get no free credit at all. Which isn't great if you make a lot of purchases in the same month. In fact, with interest rates being what they are (up to 24% in some cases) using your credit card can prove a very costly way of spending money.

How costly? Look at it this way: if you spend £3,000 this month (or euros or dollars or any other currency for that matter), and your credit card provider charges a modest interest rate of 16% APR, next month you'll be charged £40 in interest alone. Leave your balance uncleared for a year, and even if you make no further purchases, you're looking at a whoping £480 in interest. If your bank charges 24% interest, then you're looking at £60 after a month, and £720 after a year! At the same time, you'll be lucky to get 2% interest on an easy access savings account. This means that for every £3000 of savings, the bank will pay you £60 after a year (and you will be taxed on this amount too).

You might as well flash your money down the toilet. Or book a holiday to Dubai. Heh.

5 comments:

palmtreefanatic said...

wow! yes indeed thats crazy! i pay off my credit cards monthly! THANK GOODNESS for that!

Kate said...

I am trying. I have brought them down quite a bit this year so I hope to be debt free by the end of the year:-)Got a bit out of control in the last few years:-) Had fun though so no regrets:-)

Tinsie said...

@ Palmtreefanatic: Same here - can't stand to owe money.

@ Kate: I rest my case.

Caroline said...

Scary but true. Like if you buy a couch in America (and I suspect it's the same here) while there is a promotion like "pay nothing before 2010", if you pay it one month late in 2010, you will be charged the interest of the whole year, not just the month you're actaully late...

Tinsie said...

I've always thought those promotions were too good to be true.......