Existing clients can use these links to log in to the Infinity dashboard. Not a client? Why not get in touch to find out about our services.
For most of us debt is an unavoidable fact of life; mortgage payments, outstanding credit card balances, student loan repayments and vehicle financing are all part of financial planning for the majority of household budgets. Most people consider debt to be a burden and of course all debt has to be repaid, but contrary to popular opinion not all debt is ‘bad’.
There is ‘good debt’ and ‘bad debt’ and it is very important to be aware of the differences when financial planning.
Today and tomorrow we will be focusing on how debt affects financial planning with a piece on bad debt today. Tomorrow we will focus on what good debt is and how it can benefit you.
Bad debts include credit card payments to purchase things that you don’t really need and can’t afford. Credit card interest rates are generally so high, (up to 40% APR on some storecards or even higher!) that any long term debts maintained on a credit card are often very damaging to your financial health. The latest designer handbag or tropical island holiday are far from being necessities and should be purchased only if you can afford them. Using a credit card for these luxuries simply does not make sense; if you can’t afford them, save until you can.
Credit cards are one of the most inefficient forms of borrowing. Many people choose to regularly make the minimum required payment but this is a ridiculously expensive way to take out a loan. Minimum payments are usually between 1% and 2% of the card balance and create the impression that the debt is being managed. However, by only making minimum monthly payments you are not only greatly increasing the amount to be repaid but also keeping yourself in debt for an unnecessarily long period.
To illustrate the minimum payment trap let us assume a card balance of $7,500, an APR of 18.5% and a minimum payment of 2% of the balance or $20 whichever is higher. To clear the balance, by making the minimum payments each month, would take over 42 years and the total repayment would be almost $30,000!
There are far better ways to service this bad debt. Many credit cards offer interest free on balance transfers for varying periods of up to 18 months. As long as you avoid new spending on the hypothetical $7,500 outstanding card balance, a payment of $200 a month would clear almost 50% of the outstanding loan at no charge at all.
Another option for managing bad credit card debt is to obtain a bank loan for the outstanding balance at much more reasonable interest levels. The trick then is to avoid continuing card use.
The lesson of the story is that good financial planning can reduce bad debt and help you manage your money more effectively.
Tomorrow’s blog piece will focus on why some debts are good investments and how by sensible borrowing and good financial planning you can meet your aspirations and enhance your lifestyle.
If you are struggling with bad debts and looking for solutions contact us today for sound financial planning advice.
This Site and the Content are not directed at or intended for distribution to any person (or entity) who is a citizen or resident of Hong Kong (or located or established in) any other jurisdiction where the use of the Site would be contrary to applicable law or regulation or would subject Infinity Financial Solutions Limited to any registration or licensing requirement in such jurisdiction.
Persons (or entity) who is a citizen or resident of Hong Kong please click on the link below to access our Hong Kong Site.