Credit Cards shocking truth


Credit Cards shocking truth

Well today I promise that I’m going to shock you. If by the time you are finished reading this article, you are not shocked, you know – the look when your jaw drops down to the floor – please send me a message with your complaint to say, Katherine, I’m not happy you haven’t done your job properly, but I’m pretty sure that I will.  

So, let’s start.  

This is a stuff nobody wants to disclose in detail, because this is exactly how financial institutions make money and keep you in the dark and in debt for many, many years.  

We’re going to play a little bit of the game. Please prepare a piece of paper and a pen for your answers.  

Also prepare two see-through buckets. One is for your correct answers and the second for wrong answers. And then prepare lots of little objects.  

Normally I would do this exercise with coins, but being a pretty cashless society, who has that many coins at home – if you do, great, use them, however if like me you don’t, you can use marbles, pencils, pens, anything that you have lots of. So please stop the video now, collect your things and re-start this video when you are ready.  

Have you organised all your items for our little game? Great.  

I will be asking you a series of questions, and you can check your understanding of the issue. But please, even if this is not your particular situation, please play the game, just to check your own understanding and have a bit of fun.   

If your answer is correct, you place 1 item into the correct answer bucket. If your answer is incorrect, you place 2 items, in my case marbles into the second bucket. If your answer is waaaay incorrect, then I am sorry, this is additional penalty – please place 5 items into the wrong answers bucket. 

So let’s start. Imagine the situation that you owe $20,000 on your credit card. We all know that credit cards charge some of the highest interest rate, so let’s assume your card’s interest rate is 22%.   

That means you have to pay a minimum repayment of $407 per month This is what you will see on the statement, and this is the minimum you have to pay not to be penalised by the bank.  

Question No 1: How many years, will it take you to have that card paid off if you keep paying the minimum repayments required by the bank? Write your answer on a piece of paper.

I wonder what did you write on your piece of paper?  

OK, I will give you the correct answer now – it will take 77 years, 77 years to pay off $20,000, if you just stick to minimum repayments, that’s incredible. I was shocked myself and it cost me 5 marbles first time I did this exercise.  

So if you said 77 years, give yourself one marble and congratulate yourself, as I have never met a person who would get this question right.  

If you were up to 5 years incorrect, that’s two marbles going to your wrong answers backet, but if you were beyond 5 years incorrect – that’s 5 marbles (or whatever you are using) in a wrong backet.  

Question No 2. How much interest will you pay to the bank over those 77 years? 

Write your answer on a piece of paper. 

My suggestion is to have your marbles ready, and plenty of them – I got it all wrong when I did this exercise for myself.  

The answer is $87,000. That’s an incredible amount of money to be wasting to the bank. 

So if your answer was $10,000 away from the correct amount, this is costing you 5 marbles.
And yes, I had to pay 5 marbles for this one as well.  

OK, so now you have realised that the bank is taking advantage of you, you sat down, and you did your calculations, you prepared your budget. And you know that you can afford an extra $500 a month. So you decided to pay the minimum repayment plus an extra $500 every month.  

Question No 3. How long will it take you now to have that card paid off? 

I hope you will be closer to the correct answer this time, please write it on your piece of paper.  

It will take you only five years and two months.  

So you just saved yourself 72 years, 72 years of repayments.  

Again, if your answer was 5 years off the correct number – that’s 5 marbles into the wrong answer backet. If less than 5, it’s only 2 marbles penalty, and if you got it right, congratulations – that’s 1 marble to your 1st backet. 
It cost me 2 marbles. 

OK, so you were good, you were paying $500 a month and you paid the card off in five years and two months.  

Question No 4 – our last question: How much interest have you saved yourself by doing that? 

I hope you will get this one right. 

By paying extra $500 every month on the top of the minimum repayment written on your statement, you have not only saved yourself 72 years of repayment time, but more importantly you saved $76,000 in interest.  

That’s $76,000 that now you can use to buy a home, an investment property, to invest into shares or into superannuation, or to do whatever type of investment you want, but at least you have a great start to investments.  

If your answer was within $10,000 mark, that’s only 2 marbles to the wrong answer backet. If more – sorry it costs you 5 marbles. 
I was so very happy to get at least one question correct, so 1 marble to 1st backet. 

So how many marbles do you have in each backet? How did you feel about those answers? Have I managed to shock you? I was petrified the very first time I calculated those amounts.  

My score was 1 marble in the correct answer bucket and 12 in the wrong answer bucket. What was yours? 

This is a very simple, but a good example how banks take advantage of our lack of understanding and spending money based on our emotions and not rational decisions. It drives me crazy when I see banks advertising day after day, “buy now pay later”, “enjoy it now, you will worry about paying it off later”  

This is such a trap to keep you in a position of being very dependent on banks with all your income going to feed their pockets and not building your savings, your super of your investments AND your FUTURE.  

I am not opposed credit cards, actually I love them, I think that if you understand how to use them properly. You can take advantage of what banks and credit card companies created, you can enjoy some incredible benefits, such as flights or upgrades on a plane, free or discount shopping, getaways, and lots more. Who doesn’t like free shopping or free getaway?  

But the very first rule is to have your full balance paid off every month, not the minimum payment that your bank lists on your statement, the full outstanding balance.  

And if you want to use credit cards to your benefit and you know you are good with repaying your card monthly, be very selective about what card you choose to use daily, as benefits vary from card to card. 

So now you know how banks end up with your money. If you found this information shocking or distressing, I am sorry, but I did my job then.  

I want you to start thinking before you swipe this credit card again. I want you to remember – 77 years of slavery to repay that card. Think of all the great things you can do and you can achieve with your money, rather than giving this on a platter to the bank.  

This is your future, this is your family future, and I hope you realise that a pair of shoes, or that new phone or even a flashy holiday paid with a credit card is not worth the pain you will have to go through to have your card paid off.  

So please, share this this information with your family members, with your friends. Tell them to play the game. Sometimes we don’t want to hear information directly from our friends or our parents, but, when we hear it from a third party, it somehow comes across differently.  It sinks in differently.  

By: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement

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