Credit Card Analysis: From Hell to Heaven
Before 2009 I was in a dark place both emotionally and financially.
I held the view that credit cards were there to supplement missing income, handling day-to-day spending (and carrying the balance) and that minimum payments were my best friend.
What an idiot I was.
Today, continuing my ongoing thoughts on reducing the costs of debt I totaled up the cost of my “hell” credit card which is now paid off, and my “heaven” credit card that carries a balance, but at 0% APR. Once paid off this card will never carry a balance again. It will be set to ‘pay in full’.
The Hell Card was mismanaged from the day I got it (9 June 2001), and virtually ignored from 2006 onwards. This card has cost me thousands of pounds in interest, overlimit fees and payment protection insurance that I didn’t even know I had. While the online facility doesn’t provide full access to statements from day one, I have totaled up the last year to date and had a look at how badly managing a credit card – in personal finance terms – can cost you dearly.
The interesting point is throughout the life of this card, I have been reported every month as an ‘excellent’ customer to the Credit Reference Agencies. The company concerned has made money off me every single month for 8 years, and I have never missed a payment. I was their ideal customer: paid on time, always carried a balance, never challenged their fees and had their insurance to boot.
What an idiot I was.
As we can see, for the first 4 data-set points I was still burying my head in the sand. The minimum payment was going up, the interest was going up, the PPI costs were going up, and I was being dinged with a £16 over-limit fee every single month on top of this.
The next month I was charged interest on this over-limit fee, and interest on the interest of the over-limit fee on top of the balance. When you start compounding credit card fees, your debt quickly snowballs into hellish proportions.
On the 4th data point above (January 2009) I had my light-bulb moment. I’d had enough and wanted out. I balance transferred £900 off of the card onto a 0% deal, made a one-off payment to get back under my credit limit, and upped my regular payments. The fees stopped on the next statement.
From that point onwards, the card looks more sensible. Imagine for a moment though what the graph would look like if I had access to the previous 7 years worth of data. I will be writing to the company to try and get this information for another post – I’m genuinely interested to see what it looks like.
The cost of the Payment Protection Insurance goes down with the balance, as does the minimum payment required and the interest being charged. If I’d been sensible I should have canceled the PPI in January, but hindsight is a wonderful thing.
What an idiot I was.
The Heaven Card in contrast, has been well-managed from day one.
I obtained it as part of my journey to financial sensibility and debt freedom, so perhaps this shouldn’t be too surprising. I stupidly let myself be sold card protection when I activated the card, and the fee for this was charged to my Standard Balance behind my 0% transfer. Oops. Over the whole year though, the interest only works out at £12: less than one over-limit charge on the hell card.
If I’d noticed what was happening over card protection, I would not have paid a single penny in interest during the life of the balance transfer. No fees, no interest, no PPI, nada. Compare this to the hell card:
That looks considerably less painful to my wallet – and it was. Aside from the (currently) £8 in interest from my Card Protection error, I’ve not paid a single bit of interest, or PPI or fees. In 1.9 payments time the balance will be £0 and I would have paid just £10 interest for my card protection blunder. Not too shabby, and not a mistake I’ll be making again.
In total, in just 12 months (and I only had my head buried in the sand for 3.5 of those months) I got stung for £664.14 worth of interest, insurance and fees for borrowing £3,500 on my hell card. Multiply that over 7 years and that is potentially £4,648.98 worth! What an amazing waste of money. That is – all but pennies – exactly how much I am still in debt by as of August 2009. Ironic.
The real kicker: If I had opened a savings account in 2001 with £10, and paid myself that sum divided over the months, compounding monthly earning 5% for 8 years I’d be sitting on £6,558.41!
What an idiot I was.
I will be attempting to reclaim these charges at some point – if I win then it will go nicely towards getting my Emergency Fund going. If not, then no harm in trying.
I think it important I make the point that despite my own idiocy, I still do not view credit cards as inherently bad. They are not your best friend by any means, but credit cards are a tool much like a chainsaw. If you are sensible with the tool, it can make life much easier. Used correctly it can even make you money.
If you are an idiot with it though, it can cost you dearly.
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Interesting thoughts Lee – the graphs really help to bring home the problem which isn’t always easy to spot, as you proved. Good luck with getting the old data from the card company, I think I might be too scared to actually see the amount of money I’d paid them in that time.
Makes me wonder how many other people in the UK have a similar problem, and how many are yet to have the “epiphany” that you’ve thankfully had with your credit cards.
Nice graphs Lee. The only reason why I use my credit card is b/c 1) I don’t like carrying cash, 2) I get 1% back that pays off my principal in my mortgage and 3) the CC statement lists everything I spend so I can keep track.
Other than that, it is silly to keep a CC revolving debt, b/c the interest rate is so high.
@Samurai – exactly! Credit cards used properly, can be a very good way to reduce the cost of everything you buy.
@ Tom – Fingers crossed they play ball. It will be very interesting.