Recently I received my monthly credit card bill, and my eye was drawn — as it always is — to the fascinating section labelled “Minimum Repayment Warning”:
The credit card companies in Australia are required to put this section onto everyone’s bill so that you are aware just how much it costs to repay your credit card by paying only the “Amount Due” that is their minimum required amount.
For my bill, the minimum repayment amount is $53. So if I just paid this amount each month, I would be paying off the credit card debt for the next 27 years or so. WOW! That’s with the massive proviso that I don’t add any further debt by using the credit card … for 27 years!
The example that they give shows you the outcome if you manage to make about 2 1/2 times the minimum repayment instead. I am always astonished by the difference this makes. Just 2 years instead of 27, and look how much interest is saved! It’s no wonder they had to force the bank to include this section on people’s bills.
It’s a pretty black and white example, for me, why I choose to repay my card in full every month.
I realise that many people reading this may have a credit card debt, and are working really hard to repay it. You may be looking at this post and thinking I’m just trying to be smug at you: I’m really not! You guys have already made the first key step, which is to recognise your goal of paying off your debt. You may already have a plan of action, and are working towards that goal. Great work!
This post is rather aimed at anyone who doesn’t realise how much it can cost to use a credit card, instead of paying up front (eg. with cash). In Australia credit cards are everywhere, and where I live, I don’t know anyone who doesn’t routinely use them. I had assumed that people used them like I do — as a budgeting tool — and pay the full amount off each time to avoid paying interest. Apparently, this was a totally naive assumption!
So, if you are a young person wondering whether it’s true that you should “build a credit rating” by using a credit card: think twice. Unless you intend to pay the card off in full, you are taking on unnecessary debt. It’s bad enough that housing costs so much without having the added pressures of spending more than you have and then maintaining a debt for potentially years.
If you are someone who has been using credit for a while, and not paying off the full balance: think about what that really means. Think about the kinds of things you are using your credit card for. Are they essentials? Do you buy movie tickets or a new blouse or shout a round of coffee at the office using your card? If you had to use cash instead, would you have bought that?
I’m not saying you should all go out and be hermits and not buy anything that’s a luxury, and not have any friends … Far from it! Just, think about it.