Why Paying off Credit Cards Can Take So Long
If you are one of the thousands of South Africans who have had, or are currently using a credit card, you may find that you never seem to pay off all that debt. It may have just become a constant feature in your life. You are always talking about paying it off “one day”, but your account is permanently in the red.
For those in debt review, things are of course, different as the process simply stops them using the card at all and due to commonly offered concessions from the banks they quickly begin to reduce the amount owed. But why DO credit cards take so long to pay off? And why does it feel like you are chasing an elusive phantom dream of ever paying up a credit card?
Understanding how the Interest-Free Period Works
One of the big selling points about a credit card is the +-55 days to pay interest free. That sounds great and it is, as long as you keep your payments up to date and in full. Research, however, indicates that hardly anyone actually gets to benefit from this arrangement, perhaps as few as only 15% of users. The 15% make it a habit to pay up their credit card each month, getting out of a negative balance.
If you don’t pay your debt on the card off in full by the due date, the 55 days interest free falls away. This means that the bank works out interest from the day of your purchases, and not the payment due date on the statement.
It is also important to realize that if you draw cash on credit from your credit card, you immediately start getting charged interest on that amount. It does not qualify for any interest free period. This is also true if you start to use your credit card account to pay money into another one of the same banks other types of accounts (like an overdraft). So don’t think you are being smart by moving money around within the same bank, they know what you are doing and will charge you interest.
Never Just Pay the Minimum Amount
One feature that many people under financial strain appreciate is only having to pay the minimum required payment. Traditionally, this is a small percentage like 3 % or perhaps 5%. This makes having the account feel affordable.
Consider though, why would the bank not want you to pay back all the money as fast as you can? There has to be a reason, right?
If you have a credit card debt of around R20 000 and if we use an easy to calculate interest rate of 20%, then it is scary to work out how long it would take you to pay off your debt, if you only paid the minimum amount each month. Take a guess how long it will take: 18 months? 24 Months? 60 Months? Think again. If you stick to just the minimum amount then you are looking at paying off the debt over a scary 24 YEARS or more. During that time you would have paid your bank double what you borrowed. If the rate is higher, then so is the repayment time period which could shoot up to over 30 years at just the minimum. This is the scary power of interest working against you.
‘Paying back the amount over 24 months could see you save tens of thousands of Rand because of paying off the interest portion faster’
That’s how long it would take, and how much it can add up to, if you just stopped using the card altogether and just paid back the minimum amount. If you are a person (like almost every credit card user) who keeps rolling their debt and pushing the balance back up to the maximum allowed each month then you are in for fees and charges and interest of much more over the years.
Paying back the amount over 24 months could see you save tens of thousands of Rand because of paying off the interest portion faster.
Pay off your Credit Card and Save money
If you can, then make a plan to pay off your credit card debt (which is often one of the highest interest accruing types of debt) as a priority. Sure, there is a great appeal to putting a few bucks back into your card account, and then shopping up to the maximum available balance, but it is costing you money. Don’t get confused about the interest free portion, and never just pay the minimum due amount if at all possible.
‘If you are caught in an endless loop of putting money into your credit card, only to use it all again, then perhaps your situation is worse off than you think’
If you are caught in an endless loop of putting money into your credit card, only to use it all again, then perhaps your situation is worse off than you think. You may be over indebted. The good news is that if that is the case, then you qualify for debt review. People in debt review often receive amazing reductions in credit card interest rates from the banks, as they try to help their clients pay off their debts as fast as possible.