“Did I just read that right?” I thought as I put down my coffee and twice re-read this paragraph:
‘Consumers are still cautious about the debt they build up on credit cards. An analysis by card operator Mastercard shows that only 70.8 per cent of the total $46.9bn in credit card debt is accruing interest, which is the lowest level in a year.’
“Shoppers splash out $21bn on their credit cards” by David Uren, The Weekend Australian, February 13-14, 2010″
Over seventy percent of credit card debt is accruing interest. That’s outrageous! I hope that is a large amount of debt held by a small percentage of card holders – but I already know I hope in vain. Other research shows that around fifty percent of credit card holders regularly pay interest on their credit cards.
The first, most important rule of getting rich
It’s outrageous that in 2010 this is the case when the basic rule of personal financial management (and wealth creation) is to spend less than you earn. Such credit card statistics just reinforce the fact that as a society we are terrible at this basic rule and so we can only point the finger inward when we are dissatisfied with our financial achievements
But that is not what made me double-back over the paragraph. What astounded me was that the journalist Mr Uren described that high percentage as consumers being cautious about the debt built up on their credit cards.
Repay debt before building cash savings
On Wednesday I was again asked a question I am commonly asked by people with large credit cards debts, “should I use my cash savings to repay part of my credit card?”
Absolutely! Mathematically it is a no-brainer.
You earn less interest on your cash savings than the interest you pay on the credit card debt. So you are further ahead by actually having less cash and less debt.
After giving that advice the next thing I sometimes hear is “oh yeah but that cash is savings for a…[big holiday]”.
You’re joking right? Don’t even think about splashing out and probably getting into more debt while you’ve got this big anchor of credit card debt accruing interest. You’ll never get rich that way, let alone have enough money for what’s really important. (In the flesh I am much more diplomatic, honest.)
What do you think?
- Am I over-reacting to be outraged and astounded by this newspaper paragraph and credit card statistic?
- Is my suggestion about savings vs credit card to simplistic to be realistic? What makes you struggle to implement it? (share it below and I’ll reply with some suggestions.)
- Are we perhaps not socially and behaviouraly mature enough to handle credit cards? Are they legal weapons of mass financial destruction?
Please share your opinions in the comment section below. I read them all and respond as often as I can.