MONEY COMMENT
How Your Credit Cards Kill You

By Cliff D'Arcy
November 25, 2003

About half of all credit card users pay off their bills in full every month. Full marks to that astute group of people, who benefit from up to two months' interest-free credit, free insurance and even cashback on spending.

However, this still leaves millions of cardholders who end up paying interest on all their purchases (except those who have discovered the joy of 0% cards!). Many of the most popular cards charge interest rates of 18% a year or more, which is ridiculous when the base rate is a mere 3.75%.

According to statistics from the Credit Card Research Group, we spent around £117 billion on our credit cards in 2002, which works out at around £2,000 per card per year. So, what do you think would happen if you spent, say, £200 a month on your card and paid just the minimum monthly repayments along the way? Here's how quickly things get out of control:

Starting balance: £1,000 (already on card)
Monthly spend: £200 (spread evenly throughout the month)
Monthly interest rate: 1.5% (19.6% APR)
Minimum monthly repayment: 3% of your balance

Here's how your debt balloons as the years go by:

Month  Month's interest(£)  Month's repayment(£)  Current balance(£)
  12          44                    91                  2,996
  24          69                   142                  4,661
  36          91                   184                  6,050
  48         108                   220                  7,208
  60         123                   249                  8,174 *
 120         167                   337                 11,071
 240         192                   387                 12,713 **

* After five years, your monthly repayment has risen to £249 and you owe a whopping £8,174!

** After about twenty years or so, your debt levels off and reaches just over £13,000, because your monthly repayment (£397) eventually equals your monthly spending (£200) plus your monthly interest bill (£197). You're in debt limbo, with no way out!

So, would you like to know how much interest you'll pay along the way? Here it is in black and white:

Annual interest bill for
Year one:        £368
Year two:        £699
Year three:      £975
Year four:     £1,206
Year five:     £1,398
Year ten:      £1,974
Year twenty:   £2,300 = almost as much as you're spending each year (£2,400)!

So, spend in this way and you'll pay a king's ransom in interest and go to your grave with some pretty hefty debts! And don't believe this can't happen to you: it will if you pay the minimum monthly repayments on your card and keep on spending...

Find a better Credit Card | Is Your Card A Lifelong Debt? | Britain's Most Expensive Credit Cards.