Compounding Part 2 – It can work for you, or against you!



Eleven words that can send a shiver down your spine – especially today, where the 3rd Monday of January has now been dubbed ‘Blue Monday’ – the day when you’re most likely to get a credit card bill for your Christmas spending – and although the thud of the bill arriving has been lessened by the wonders of paperless statements the impact can still be just as great.

It can vary from a vague resolution to spend less this year, to a full scale mental breakdown – with some mental health charities proffering scary statistics that that credit card bill can really be the straw that breaks the camel’s back.

For all the depressing and negative talk around Blue Monday it’s actually a day that spurs people into doing something to help sort out their finances.

StepChange Debt Charity says that it’s one of their busiest days online; people search their website and blog for advice on how to seek help and their online debt advice tool Debt Remedy is white hot with people actively looking for debt solutions.

For people wanting a face-to-face approach – a meeting with a Financial Adviser, can help put their spending in perspective – sometimes just understanding where your money goes each month can be the jolt you need to get things back under control.


So what’s the big problem with credit cards anyway?

  1. Contactless technology and internet shopping make them easier than ever to spend on, and many people lose track of their balances.
  2. Minimum repayments can be set these days as low as Interest plus 1% of the balance – especially deceptive on a 0% for 9 months purchase offer, where your monthly repayments could be as low as £5 a month.

But that’s not much – I can afford that…

As a short-term, maybe – if you’re dedicated enough to repay the whole amount before the deal ends, you’ve had a lovely interest-free loan – but if not, your rate will increase and that is where the problems begin in the form of the big one….

  1. Compound interest!!

Now, strictly speaking – you don’t actually pay compound interest – as since changes in UK regulations in January 2011 now mean your minimum monthly payment needs to be enough to clear the all interest PLUS 1% of the balance.

The problem is that by paying a percentage of the debt each month, as you make repayments and your balance slowly decreases, your monthly payment also decreases month on month, which has the same effect of compounding and allowing your debt to grow, when compared to making a fixed repayment each month.


We’ve seen how compound interest is great for savers and investors – but this is the flip side to the coin

If you have a credit card with £5000 on, at a rate of 10% (mid-range for someone with good credit) by paying the minimum payment (1% of the balance plus interest) each month it will take more than 16 YEARS to pay off the debt – by which time you will have paid a STAGGERING £3492 in interest and charges – much more than half as much again – scary!

What else could you spend £3492 on?

The average UK household has more than £9000 un-secured (non-mortgage) debt and many people simply move balances about, trying to take advantage of introductory deals, without ever really making a dent in repaying them.


So what’s the solution?

In this case, if you kept the monthly repayment at the initial level of £91 a month, rather than letting it decrease over time– you would repay the debt in just over 6 years and save £1779 in interest – but the credit card company is not going to volunteer this information to you, are they?

For most people it’s not really burying your head in the sand – simply that they don’t understand the impact of having a credit card debt and the impact this could have on their future goals.



It’s often even worse if you have historic credit card problems and have a credit card with a much higher rate of 20%-30% a year…and don’t get me started on Payday loans – where a missed payment can mean you never get on top of them – and even if repaid in full can hamper your chances of getting a mortgage for TWO years (that’s not in the small print).

So we are offering people the opportunity to let Blue Monday be the first day of something really positive: the day they finally re-take control of their finances.

Time to create an escape plan?



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