When you think about credit provided to consumers, it’s worthwhile to apply the old proverb about fire. It’s a wonderful servant, but a terrible master. Credit traps are everywhere these days; you can get almost anything you want today on credit. The latest IPhone, electrical goods, furniture, cars and almost anything else including a massive financial millstone around your neck possibly for a lifetime.
Compound interest can be a crippling liability that reduces your capacity to spend and save your income as you would like to do. Sure accessing easy credit can get you what you want to have today, but unless you’re very careful that easy credit can prevent you from having the freedom and lifestyle that you want in years to come.
Credit has a way of seducing you into easy decisions that result in long term pain. It’s an easy trap to fall into. The following scenario is all too familiar to many young people today.
There is a new electronic device on the market. Everybody is getting it. It only costs $1800 and you can pay for it with your credit card and be up to date with the latest piece of technological wizardry. There is no pain to speak of and the minimum payments on that credit card debt are only $45 per month – just $11.25 per week. It’s such a small amount you won’t even notice.
Seemingly, there is nothing to worry about. You have your new device, the credit card bill comes in and you pay the minimum amount. You don’t notice the little clause at the foot of the statement that says paying the minimum amount will take you 15 years and 7 months to clear the debt.
Your new device is cutting edge for exactly fifty two days. A new model with more features and better functionality hits the market and everyone just has to upgrade. Of course, you want to too and you have plenty of credit available. Those nice people at the bank approved a $6000 limit – so that’s OK. The new model costs $1800, so you pay for that on your credit card as well. The extra repayments won’t hurt. You can always cut back on expenditure if things start to get tight. Besides repayments will only increase to around $90 per month – just $22.50 a week. There’s nothing to worry about really. Is there?
Your downward credit spiral has begun and you have now been snared in a credit trap. Without some serious behaviour change on your part it will not have a happy ending. Credit traps are designed this way!
Now let’s fast forward two years, three new devices, an increased credit limit, a second credit card and the occasional late payment fee.
Both credit cards are maxed out. You are committed to minimum repayments of nearly $400 per month and you want a new car. You have no savings. Those nice people at the bank are not so nice any more. They want to see you demonstrate a capacity to repay any increased commitments by showing savings for six months. You can’t wait six months. There has to be an easy way out. . There’s plenty of easy credit around, you can find somebody prepared to lend you money. Of course your commitments will increase, but you’ll find a way. You always have.
Your phone rings. It’s the credit card department at the bank. Your payment is late. They want to know when you can pay.
The nightmare is just beginning.