Thursday 8 February 2007

Stupid cupidity and the exploiters

The credit card business thrives on the cupidity and stupidity of some of their customers who spend more than they can afford and delude themselves into believing that the minimum repayment makes the debt manageable.

What the borrower fails to appreciate is that not only is the level of interest much higher than a normal bank loan, but the fine print hides a far greater cost penalty.

Assume you owe £7821.00 and repay £6753.00 on the appointed day. At 1.385% a month interest, you would expect to pay £14.79 in interest based on the unpaid sum of £1068.00.
In fact you would be asked to pay £166.92. That represents an interest rate of 15.62% per month or close to 200% per annum.


Because you are charged for the entire outstanding debt - in this case the whole £7821.00, despite the bulk of it being repaid on the due date, and because the interest is charged from the moments the purchases were made. In this example three weeks before the credit card bill arrived.

The financial behemoths eagerness to lend money to people in existing financial difficulties is well documented. They thrive on Micawber type misery.

Banks also operate in the “sub prime” loans market. The HSBC, one of the top three banks in the world sensed an opportunity in lending money for house purchases, to people who wouldn’t otherwise qualify. In the United States, this has already backfired with fraud and defaults rising to record levels. Over here, the number of sub prime lenders tout their wares on television with offers to “consolidate” debts, or by remortaging their homes, allow borrowers to spend their own money on whatever they choose. The cost? More than their existing mortgage provider would charge.

And new predators are advertising their helpful services. They offer people with unmanageable debt a way out by exploiting a voluntary scheme whereby only a proportion of the sums owed needs to be repaid. Inevitably this service comes at a cost.

There really isn’t such a thing as a free lunch.

1 comment:

Clint Valladares said...

My wife, Kalina and I have found a way to benefit from using a credit card. We have just one credit card and make most of our purchases on the same. I have even paid my school tuition with the same.
The trick is to pay the entire amount as soon as we receive the bill.

We do not buy anything we cannot afford. The great part is that we have been able to save on all kinds of benefits at hotels and airlines. Last year we accumulated enough airline miles to get 2 free tickets from the States to Europe. We are still waiting for that FREE LUNCH.