This time I thought I would talk about Credit Cards and Line of Credit loans because more and more people are using them together as part of a strategy. There are some misunderstandings so I thought I might just clear them up!

Credit Cards.

Many financial institutions offer interest free credit through special Credit Cards. To receive free credit on these cards you must fully repay the previous month's balance by a certain 'Due Date'. Some Credit Card advertising material suggests that you can receive up to 55 days interest free! This may well be true. Just remember though that you must make repayments monthly and not every 55 days if you continue to use the card. This is how it works........

If you opened a brand new 'Interest-Free' Credit Card account on the 1st day of the month and began making purchases straight away. On the 1st day of the following month the bank would generate a statement informing you of the amount you had spent during the first month and must now pay back. If this was due on the 24th day of the second month and you make the repayment in time, in this case you would pay no interest.

If the first month had 31 days, you would have received 55days (31+24) interest free, but only on the purchases you made on the first day. The purchases made on the last day of the month are actually only 25days (1+24) interest free! To avoid paying interest, on the 24th of every month thereafter you will need to repay the expenses you put on credit for the previous month. (An average of actually only one month interest free)

Simply Budgets can help you plan to fully repay each month's Credit Card purchases and therefore help you to avoid the payment of any interest.

Line of Credit loans.

With a traditional mortgage your spare cash is kept in some form of savings account waiting for when it is needed and often earns you so little interest it is not worth mentioning. Once a month you make a mortgage repayment and after 25 yrs or so you should own your home.

With a Revolving Line of Credit you keep all of your spare cash in your mortgage and draw it out when it is needed. Because this money is, in effect, reducing your outstanding debt during the time it is sitting in your 'Line of Credit' mortgage the interest you are charged is reduced and you can therefore pay the loan off faster than normal.

There is a danger here though because you are actually using your mortgage as a day-to-day working account. If you are not careful, you could end up accidentally spending all of the savings benefits you were trying to achieve by using the Line of Credit loan. Simply Budgets will give you the ability to plan your loan's reduction and then help you follow the plan.

Some people use their Credit Card as a way of keeping more of their money in their Line Of Credit longer. If you deposit all of your pay each pay, and use your Credit Card for all or most of your purchases, you can accelerate the loan repayment. This strategy on it's own can reduce an average loan by a year. I have had a few arguments with some people who believe that this strategy will more than halve the repayment time, but this is not so. In fact, the overall benefit is easily identified. If you used a computer to calculate the time to repay a standard mortgage, and then recalculated the loan starting at a balance one month's worth of spending lower, you would pretty-well get an accurate indication of how much time you could save.

If you have a Line of Credit loan and want to pay it off faster you can use the Credit Card to help, and you can use the Simply Budgets package to discover how much you can possibly reduce the debt by over the next year. If you print this plan and put it in a prominent location where you can see it and follow it you can then make it happen.

I have met people who have made no progress on a Line of Credit mortgage after five years or more simply because they had no plan!

Until next time....
... To prosperity -

David Wright


Thank you.

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