If you ever need extra money, the first thing you should do is to use your short-term savings (money in your easily accessible savings account). If you need more money or you do not have any savings – ask your family, friends to lend you some – that’s your second option. The third option is your long-term savings. Remember you saved (if you followed our advice in our previous article) this money for big future buys and you should avoid touching this account unless it is a critical emergency. The fourth option is to use your credit card. The biggest issue here is that people usually use their credit cards as the 1st option instead of the fourth. Credit card balance is used without intention to pay in full at the end of the month even when there is money in savings account! Are you one of them? If yes, stop now and look how much you are loosing:
Standard credit card APR can be anywhere between 9.9 to 34.99%+, let’s take the popular example and say that your credit card has an APR of 19.9%. If you bought something worth £2,000 and decide to pay back only a minimum amount (the greater of 1% of the balance plus interest or £5) per month, you would pay off your debt in 24 years and 4 months and by that time you will have paid off £2,854 in interest alone! That means that instead of £2,000 you return your bank £4,854!
Even if you decide to pay off your balance in one year (£185.17 every month) you will be returning £2,222.04 after one year. If you used your savings account you would have an extra £222.04 in your pocket! To make things worse, the majority of people never ever get off the credit card debt meaning they pay of some of the balance and later make more purchases on the card and loose their money month after month. I have an office job and I have colleagues who earn twice as me, and all they do at the end of each month is cover the minimum amount of their credit card bill!
The fifth option is to take a pay day loan. I really do not like even the fact that I am mentioning it here, but people see advertising on the TV (QuickQuid.com) and they do use this. This is probably the worst place to get a loan from all possible places, maybe even worse than asking for money from a drug dealer (Just for a record, I am not suggesting doing this either).
The advertised service QuickQuid.com offers you to get a loan from £50 to £1,000 as a new customer and even up to £1,500 for existing ones. But if you look at the terms you will see that the APR is 1,734% Representative! Representative means that only 51% of people will get this deal and others will be offered even higher interest rates. I mentioned that standard credit card offers 19.9% APR, but QuickQuid quotes APR of 1,734% which is unimaginably worse. Anyway, you cannot directly compare effective credit card APR to QuickQuid APR without doing extra calculations since it is not the same thing. This is because QuickQuid and other Pay Day Loan companies use Finance Charge in APR calculation and it is different to standard credit card interest calculation:
Credit Card interest calculation
- Work out your average daily balance. Let’s make it simple and say you buy something for £1,000 on the billing day 1 and then something else on a day 15 for another £1,000. If month has 30 days calculation is: (15 x 1,000 + 15 x 2,000) / 30 = £1,500.
- Calculate the daily interest rate. Simply take APR of your card and divide it by the number of days in a year. If APR is 19.9% and current year has 365 days, daily interest rate would be 0.0545%.
- Now take average daily balance, multiply it by average daily interest rate and multiply the result by the number of days in a month. £1,500 x 0.0545% x 30 days = 2,453.42 pence / 100 = £24.53
- Most credit cards will charge you interest on interest, meaning if you do not pay off your balance in full, interest from previous month will be included in interested calculations for the next month.
QuickQuid interest calculation taking into account the Finance Charge
- You pay £14.75 Finance Charge per each £50 you take
- To make things comparable with Credit Card and let’s take out a maximum £1,500 loan (average balance of credit card example above).
- After one month interest would be (£1,500 / 50) * £14.75 = £442.50 (This is equivalent to 354% APR Credit Card charge), now compare it to £24.53 you would pay for your credit card!
- The longer you wait – the higher the effective APR becomes!
- You should use this service only if you have NO other option and you are 100% SURE you will be able to pay the loan back on the next Pay Day.
I hope I have made some things clearer for someone… Beware and Share