Bushfire Ratings vs Credit Card Interest

The Victorian bushfires earlier this year were an awful thing. They really shocked my family and me, along with the whole country. It would have been extremely hard for everybody that went through such a thing.

While the bushfires were an incredibly terrible thing to witness on television, I really thought that Australians did their best to help the victims by donating their time and money. There seemed to be a mateship that was going on right around the country.

One thing that has changed in South Australia since the fires has been the warning system used. They have updated it to make people more aware of the dangers of potential bushfires.

The fire system is now as follows:

       Low to moderate

       High

       Very High

       Severe

       Extreme

       Catastrophic

This new system leaves people in no doubt as to what the daily risks of a bushfire are in their area.

This got me thinking that maybe we could apply a similar system to interest rates on credit cards. There are credit cards with all sorts of interest rates. But a few percentage points between them (for example, 15% to 25%) should not be seen as a small difference in rates. This should be seen as a huge difference in rates.

Let’s say you take out a credit card with 15% interest per year and you charge $5000 for a new plasma TV. You pay the minimum each month over the course of a year. At the end of the year you would have paid $721 in interest.

If you made the same purchase with a 25% interest rate credit card, you would have paid $1188 in interest.
As you can see, there is a huge difference in the annual interest paid for each card.

Let’s redo the fire warning system and apply it to credit cards by rating them on what I consider to be low to catastrophic interest rates.

       Low to moderate - 0% to 5%

       High - 6% to 8%

       Very High - 9% to 11%

       Severe - 12% to 14%

       Extreme - 15% to 17%

       Catastrophic - 18% plus interest rate

You might be thinking, “Geez, you consider 18% catastrophic?” Absolutely - 18% plus is catastrophic. This is almost highway robbery.

However, the funny thing is that almost all the credit card offers I get (and you too) are around 18% and more.

Let me explain why I believe anything above 18% is catastrophic. Let’s pretend that in January 1980 you invest $10,000 with a bank that promises you 18% interest on your money.

So you find this bank that is willing to give you 18% each year forever on your $10,000. How much money do you think you would have now, in December 2009?

You would have $1,215,004. Yes that’s $1,215,004!

Just for fun if you kept that investment for another 4 years, until 2013, you would have $2,355,624. All from an original investment of $10,000 in 1980. This is where interest works for you, rather than against you.

Can you see why credit cards are so profitable for banks? They make huge revenues on cards that could even be higher than 18%.

Why in the world would you want to pay out 18% plus on your money?  It makes no sense. Maybe the goverment should make the banks put a warning on credit card applications. If the card is above 18%, they could put CATASTROPHIC INTEREST RATES in big red letters.

Getting rid of credit cards will help you more than any other thing to get you out of debt. Warren Buffet, the world’s second richest man puts it best: “Stupid people shouldn’t have credit and smart people shouldn’t need it.”

Be one of the smart people and don’t get sucked into this extremely high interest way of borrowing money.

Just for fun I found that the highest interest card I could find on the credit card finder website was 29.49%. Had we invested $10,000 in January 1980 at this interest rate, it would be worth $17,982,502 in December 2009. Yes, that’s nearly 18 million dollars!

Plus if we wait just four more years, until the end of 2013, it would be worth $50,558,597. Not bad for a $10,000 investment.