A not so close friend recently approached me to borrow money. Having just finished collecting another debt, I asked him what his story was. He needed to pay some deposit and was out of options as he had slowly accumulated debt, rolling it off different credit cards and is approaching debt consolidation to stem the snowballing debt.
How did he get into this mess? It started off I guess when he paid for his home renovation using credit cards / lines. At first, he just paid the minimum sum.
So that's where the problem starts. Currently, the monthly interest rate on unpaid credit card / line balances works out to be about 2%. On a per annum basis, this equals 1.02^12-1 = 26.8%.
If his initial debt = 1070, and he makes payment of 70, 2% interest = 20 will accrue, so he would only have cleared off 50 of debt, and still owes 1020 next mth.
And his current debt level isnt just 1000. From what I gather, his outstanding debt is probably close to quite a few months of his salary. Even if he tries to use 10% of his gross take-home salary to clear the debt each month, he probably would be stuck in the debt trap for perhaps a good 7++ years. The banks would probably have made close to 2+ x the original principal over this time. (And I am just using agaration.)
This is scary, very very scary.
The good thing is he realized this issue and has approached credit counseling to consolidate the debt to tackle it.
I hope he gets through this.
Personally I have also fell into the debt issues when I first started work, but thankfully I realized it early and cleared it off within a year. Some years ago, I even slashed my credit card limit to 3,000 (about 50% of my gross take-home salary then). It was only when I travel for vacations I would request for a temporary limit increase. And even so, I would pay it off 100% when its due. If I had the stomach for sucb unnecessary interest expense, I would rather leave it in my budget or reserve.
Hope this has been a good read for you and you have some takeaways of your own.