Moving debt via a balance transfer
The financial mistakes of Jack and Jill
The following story is based on true events:
There is a couple, let's call them Jack and Jill. They're in their mid to late twenties. They are reasonable earners with a combined salary of £70,000. Not bad for the UK. Not bad even considering that they live in London. Their combined earnings net them roughly £4,500 per month after tax. They have no children and own their own home. Their monthly mortgage costs are £1,000 per month, bills roughly £400 and transport into the City about £200 per month.
With these impressive finances Jack and Jill should be on course for financial freedom so long as they play their cards right. Unfortunately, no one ever taught them the discipline. They have one big vice. They love going on nice holidays - really nice holidays.
Let me point out at this stage that there's nothing wrong with going on holiday. Just make sure that it's within your means. Jack and Jill spend £5,000-£7,500 on their summer holiday each year. What's worse is that they don't have the cash to pay for it so they put it all on credit cards.
Credit card disaster
This year they put £5,500 on credit cards in order to take a holiday to the Maldives, staying in one of those incredible beach huts. What doesn't make any sense is that they still had £3,000 on credit from last years holiday. Jack and Jill explained that it isn't a big issue. They explain that their credit cards are interest free for the first twelve months. When it comes to the period in which they need to start paying interest all they do it take out a new credit card with 0% balance transfer. They reason that it's fine as they won't be paying any interest.
How naive they are. They seem to have totally forgotten that they will actually have to pay back the money to a credit card company one day. They cannot keep taking out more and more credit cards and moving the balance. At some point they will reach the limit of their credit and will not be able to take out a new credit card to cover the old balance and then some.
Overconfidence in financial decisions
Sadly, Jack and Jill think that they've been incredibly smart and believe that they have outsmarted the credit card companies. One day, this will bite them - really hard. Readers, be wary of 0% balance transfers. It encourages overspending and taking on debt. Do not spend what you don't have, especially not on luxuries such as holidays.
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