I read an article in The Guardian  today that really pissed me off. For those familiar with the money section of The Guardian, they run an article every so often focusing on how different people spend their money. The column is called How I Spend It. Now, I realise that it is not meant to be an advice piece, much like my blog. I’m not a financial advisor. I have some financial qualifications like a Certificate in Mortgage Advice and Practice which means I am qualified to give mortgage advice. But I’m not a financial advisor. I’ve read extensively around money, budgeting and how people accumulate either wealth or debt. I may not be qualified but I think I am knowledgeable and experienced.
Anyway, in this article the young woman talks about how she “invests” in experiences. I agree that life is for living and that we should not live to work. However, experiences in the sense of holidays, restaurants, drinking and so on are not investments in my opinion. They are luxuries. In my experience, the average person who prioritises experiences over building a solid foundation of wealth based in assets will inevitably accumulate debt. The telling thing for me in the article came near the end when the young woman explains that her Dad bought the property she lives in and she pays £250 per month for the mortgage and an extra “couple of hundred” for the bills. Unless there is some extraordinary set of circumstances, this woman is paying under market value for her “rent” and probably not paying the full cost of the bills either. I’m not saying this is wrong; her Dad has obviously helped her out but I don’t see the benefit, or point, of the article. It’s not giving the average person any real direction on how to spend their money apart from a vague argument for the benefits of living in the now and spending disposable income on “experiences”.
It really grates on me when people promote this idea of living in the now and “it’s just money”. What does that even mean? “It’s just money?”
A few days ago Yahoo Finance  reported that the Financial Conduct Authority released a report stating they may recommend that the minimum payment requirement on credit cards be scrapped. Apparently this will increase the amount people repay on their credit cards. Let that sink in. Removing the minimum payment requirement will increase the amount people will repay. I can sort of see how this would work for some people, but only those who are financially literate already. Unfortunately, in my experience, most people are not financially literate.
Over the years I have known and interacted with a number of financial professionals from brokers to advisors. Many of them do not practice what they preach and are heavily in debt with credit cards being the main type of debt. According to The Money Charity , in January 2018 UK credit card debt stood at £70.35 billion, or just over £2,500 per household. I was speaking to a friend of a friend today, who had been pointed in my direction as my friend knew I have an interest in money. This friend of a friend was heavily in credit card debt and was thinking of taking a loan to pay the debt off. Their credit card debt stood at a little over £20,000 and had accumulated over the course of three years through normal day-to-day spending. A rough, back-of-the-napkin calculation suggests that debt must have increased by roughly £500-£600 per month, every month for three years. The loan would have a repayment of £280 per month over nine years at roughly 9% interest. Not bad compared to the high rates being charged on some of the credit card statements I was looking at, with total monthly payments on the cards coming at just under £600 for the minimum payment.
My first question to this person was; “what will you do with the credit cards once you pay them off?”
The person thought for a moment and admitted they would keep them open as they wouldn’t get used as they would be saving £300 per month with this loan. Think about what you know about this person. Are they saving £300 per month?
Let’s look at the numbers again.
The credit card debt has been growing for three years at roughly £500-£600 per month.
The minimum payment is roughly £600 per month. Interest is being charged at almost 19%. For the sake of simplicity, I will talk in general terms now. Each payment being made is roughly half interest and half capital. This will obviously change over time so long as no debt is being added to the total. After maybe thirty monthly payments, the monthly payment of £600 will be 80% capital and 20% interest. What is missing here?
The person through normal day to day spending has been increasing their credit card debt by £500-£600 per month. So, as they pay £300 off the capital, they are actually increasing their capital by a minimum of £200 per month. It’s not sustainable and will only lead to one outcome; default and possible bankruptcy.
I say again; debt increasing by £500-£600 per month. The person pays £600 per month, but on the interest charged only around £300 is coming off the debt which is increasing at a faster rate (£500-£600 per month) than it is being paid off (£300 per month).
So, coming back to my question “what will you do with the credit cards once you pay them off?”
Simply saying you will be saving £300 per month with the loan is financial insanity. You are already losing £500+ per month. If they clear their credit cards, they still have to make the loan payments of £280 per month. On top of that their debt will start to increase by roughly £200-£300 per month and in a few years they will end up right back where they started.
Scrapping minimum payments on credit cards is not the answer. Increasing the minimum payment is. Those people who live life in the now with no regard to money are more likely, in my experience, to live beyond their means and build up credit card debt that can never really be repaid. Inevitably these debts are written off as, per the old saying “you can’t get blood from a stone” but that is why my APR is 19% instead of half that. That is how the credit card companies get their money and make their profit.
If you can afford to live a good life and enjoy experiences without getting into debt, like the young woman in The Guardian article, then great. More power to you. Enjoy your life. With that fortune comes responsibility to make sure that you understand how your privilege permits you to do this and how it is not possible or responsible for other people to necessarily follow in your path.
I think credit cards can be a fantastic tool. I have a credit card that takes some real hammer. Almost all my disposable income is, in some way, filtered through my credit card. I do this because I earn Avios points (air miles) but I near enough always reduce the balance to zero within a few days or weeks of spending on it. My credit card comes with a modest fee (£30ish per year) and for that I can use the card abroad with no fees or commission. It’s a fantastic tool in the right hands. The APR is pretty scary at almost 30% but I rarely am charged interest because I reduce the balance to zero almost instantly. I am not anti-credit. I am anti-irresponsible lending. In my opinion credit cards should come with much tougher affordability assessments. It’s just so easy to get credit, even after the crash of a decade ago.
If you are struggling with debt then I strongly recommend you contact Stepchange, a government backed charity that can assist and advice on matters relating to debt.
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