Tuesday, 15 November 2011

Is credit card killing us?

Many Malaysians(especially Gen-Y) are incurring huge credit card debts, and it’s surprising that many are not even aware just how much these debts are really costing them. Ignorance is certainly no bliss in this scenario, and in order to get out from under the burden of debt, it is important to understand the underlying truth.

When Credit Card Company allows you to pay back your loan in small amounts, it is not out of the kindness of their hearts. In fact, if you take 30 years to pay off your outstanding balance, you would be their ideal customer. When you make only the minimum payment as required by them, most of it goes towards repayment of interest instead of repayment of interest + principal, which is why it takes so long for you to pay off the original debt. Thus, making the minimum payment each month guarantees that you will be filling the credit card company’s cash coffers with your hard-earned money for many years to come. If you cannot pay more than the minimum balance in every statement, then you cannot afford whatever it was charged to your card in the first place. This is equivalent to paying RM5000 for an item that is marked with a RM2000 price tag.

Leveraging is good when used to build assets such as property and equities. You gain access to a large amount of capital to magnify your returns. However, leveraging to satisfy superficial materialistic wishes like fancy cars, overseas travelling, expensive dinners, and luxurious life style is a destined-to-lose situation. Learning to live within one’s means is extremely crucial to build up a healthy and debt-free lifestyle.

Don’t get any deeper into debt. Now it’s the time to reduce your debts and move on. Use your savings to cut down debt since it makes no sense to earn 1 to 3% p.a. interest on your savings account while paying 12 – 18% p.a. interest on credit cards.

Add up all the money you spend each month on credit card payments, and think about what you could do with this money if you weren't paying it to the credit card company.

1 comment:

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