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The cunning credit card plan for personal debt

Steel engraving of trojan horse from 1875

Hedge fund CIO Mark Mahaffey details the astonishing levels of personal debt we now live with and suggests a novel way to beat the credit card companies at their own game

Philosophers have long debated whether greed is a natural or acquired human trait but maybe the analysis should really be focused on impatience to consume. Our history shows us that anyone who has the ability to spend tomorrow’s earnings today, rather than wait, does just that. Whether it has been a medieval monarch, the perennial vote chasing politician, or the majority of the developed world’s populace, it’s a sad fact.

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In the UK the numbers are truly astounding but we don’t really take much notice. Mortgages, student debt, car leases and credit card overdrafts are all just part of the human desire to ‘live’, it would seem. But are we heading for a debt crisis for real?

Personal debt is a growing problem

Personal debt is a growing problem

The unfortunate statistics in every category show rising levels of total debt and worryingly high growth rates of debt.

UK Credit Card lending, source: Bank of England

UK Credit Card lending, source: Bank of England

The rate at which debt is growing is also increasing

The rate at which debt is growing is also increasing. Source: Bank of England

With one in six consumers reportedly, ‘maxed out’ on one or more credit cards, we are in a pretty precarious place. The level of interest rates for our different types of debt varies dramatically. Mortgage rates are still ultra-low with the average around 2-2.5% but credit cards can be as high as 26%.

Individuals are exposed to myriad interest rates

Individuals are exposed to myriad interest rates

While most people’s mortgage is their largest single debt, it is often not their largest monthly repayment. A £200,000 mortgage, fully repaid over 25 years is £900 a month but the interest only mortgages that are still outstanding are only £220 a month. Compare that to the £20,000 credit card debt where monthly repayments are close to £500 at 26% APR, just to stand still!

There is a sizeable spread between unsecured debt at 26% APR for the worst credit cards and secured mortgage lending but the credit card issuers face two large margin detractors: fraud, which last year cost over $25 billion and debt write-offs for defaulters.

However, two statistics stood out in the latest debt charity research, bringing some positivity to the issue. Only 56% of credit cards had interest bearing balances and because of this the average credit card interest rate across the spectrum was only 18%.

Changing people’s attitude to debt is far too great a challenge. Whether it’s out of necessity to barely survive or the need to consume in order to ‘live’ life today and to hell with tomorrow, we will continue to indebt ourselves. Saving for a rainy day seems like an old wife’s tale to many nowadays.

But what we can advise is, spend some time getting your monthly credit card interest bill down. Google ‘compare zero interest credit cards’ and do everything you can to transfer your balance from your current high interest rate credit cards to zero or low rate cards. And don’t give up if at first you don’t succeed. There is always a new deal, with lower credit score requirement if you wait.

But obviously bear in mind that these teaser rate deals are there to get you to transfer over; they only exist because the credit card companies know that when the deal runs out you will probably still be in debt and too lazy to change and will start paying them the interest that you currently do to another provider. Why not beat them at their own game and use the zero percent deal to pay off your debt? Just a thought.

Mark Mahaffey is the CIO of hedge fund Hinde Capital, the views stated here are his own

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