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- Managing Credit Cards & Payment Options
Is your credit card working for you or are YOU working for your credit card?
Important: This hub is not intended for people currently in financial problems. It's intended to make people aware of the costs, risks and responsibilities in connection with the use of credit cards and does not replace professional advice
Yes, you CAN get free money with your credit card, it’s not a joke. But nothing comes easy. You have to be wise and responsible and pay down your credit card debt at the end of each month. It's worthwile and I will show you how much it can add up to:
The time before credit cards
Credit cards are the curse of humanity. Why? Because you can spend thousands of dollars in just a few seconds but it may take you over a lifetime to repay your debt. At this moment the Canadian household debt –to-income ratio is a staggering 150%, which means that most people will never be able to repay their debt unless they start acting NOW.
I remember a youth where credit cards didn’t exist and people had to pay for everything in cash. What we couldn’t afford, we couldn’t buy but most importantly - we had to save in order to purchase the odd luxury. I will never forget my first boom box which I bought after five weeks of slaving on a summer job. It fulfilled me with a sense of pride and achievement, one that lasted for many years and not only until the next model came out. Money was something that we could relate to, something that we could hold in our hands, something that we wouldn’t let go easily. Monopoly was a fun game with virtual money that enabled us to buy things that were not tangible in real life.
I have a simple explanation why most boomers are financially stable and fairly wealthy. They grew up without credit cards and learnt how to deal with money. Nowadays, we all play Monopoly and buy things with plastic money, things we can’t afford and also quite often, things we don’t really need. Status symbols to impress our friends and neighbours that cause us sleepless nights rather than joy.
People quite often have the false belief that we had more buying power in the 60’s and 70’s than we have now. I disagree. In those days most families had one small house and one car, nowadays big mansions and several cars are the standard. As a 3rd child I had to wear hand-me-downs whereas the modern day kid wears designer labels. Our expectations have grown out of proportion and our education doesn’t prepare us for budgeting and debt management. Credit cards were designed as a convenient and safe mode of payment but the inventors forgot one important thing: Greed
Do you know how much your stuff really costs?
We just received our latest credit card bill. Within one month we had managed to spend a staggering amount of $ 7’177.58. Our daily running costs like food, gas, utilities, dentist were not the main culprit, the major expense came in the form of an unexpected overseas trip to visit our aging parents whose health is getting worse. Fortunately, this month is a rare exception to our otherwise frugal life but it shows that you always need to be prepared for the unforeseen.
We belong to the bulk of people who charge at least 90% of their expenses to our credit card account in order to received reward points. This works out great for us, AS WE PAY OFF OUR CREDIT CARD DEBT AT THE END OF EACH MONTH, contrary to probably 95% of the population who don’t and make the mistake of making minimum payments. Now, I will give you a small example that might make you think:
If we only made the compulsory minimum payments of $ 44, at an interest rate of 19,99% it would take us 62 years and 8 months to fully repay the outstanding balance of $ 7’177.58. This is a staggering 752 months! And if you calculate how much you actually pay over this period it gets even worse:
Credit card Balance: $ 7’177.58
752 payments of $ 44.00 $ 33’088.00
Interest paid to the bank $ 25’910.42
Now you are probably enraged about these damn banks who rob us blind. You shouldn’t be, because the banks are actually very generous. You only get suckered if you are naive enough to make minimum payments – your fault! On the other hand, by paying off my credit card bill at the end of each month, I get an interest free 21 day loan and all the other perks like Reward Points, Purchase Security & Extended Warranty Insurance up to $ 500’000 in Travel Accident Insurance, Auto Rental Collision/Loss Damage Insurance. THIS IS THE FREE MONEY I WAS TALKING ABOUT EARLIER ON. For me it’s a win-win situation but one that requires a lot of self-discipline. Here are a few useful tips how I do it:
- Only use one credit card. It’s easier to keep track of your expenses and it’s cheaper as you don’t have to pay several annual fees. Shop around which credit card works best for you (e.g. more reward points vs. lower interest rate vs. lower annual fee etc.). Calculate how much these rewards points are worth. Sometimes it makes more sense to get a free credit card with less perks.
- Create a monthly budget and keep track of your spending (this is where your one and only credit card will come in handy). Most people don’t have a clue how much they are spending each month – a sure recipe for disaster.
- Don’t use your credit card to pay for things that are not in your budget unless it’s for emergencies.
- If you use your credit card but don’t intend to pay off the full amount at the end of the month, add the interest to the purchasing price multiplied by the number of years it will take you to pay it off. That’s the actual amount that the item will cost you! Most people forget this.
- On the same note, always add the Sales Tax to the purchasing price e.g. a TV might cost you $ 1’000 but with HST $ 1’150, something that is quite often overlooked.
- If you are an impulsive buyer, leave your credit card at home when you go shopping.
- Remember: When you just pay the minimum, you're only paying the interest, so you'll never get ahead of your credit card debt. With help from your monthly budget, determine how much money you can pay towards your credit card balance and stick to that commitment.
- Don’t use your credit card to pay off another credit card debt unless it's with a low interest card. You will only re-distribute the debt.
- The "buy now pay later" offers are tempting traps: If you can't afford something today, don't buy it just because you have to pay it only in e.g. 18 months. You will probably not have the money then.
- IF YOU CAN’T AFFORD IT, DON’T BUY IT!
Now I will give you a real reason to become enraged, and one that proves that my credit card bank really is very generous, by giving me a free loan of over $ 7’000 for a period of 21 days:
If I took out a payday loan of $ 7’000 in the province of Ontario for a period of 21 days I would have to pay a staggering $ 1’470 interest ($ 21 per each $ 100 borrowed)! So what I am getting from my credit card bank is actually a present of the same amount.
PS: It goes without saying that nobody would give me a payday loan of $ 7’000 in the first place (max. amount $ 1’500).
I am not trying to promote credit cards here or to praise credit card institutions. What I am hoping to do with this article is to open people’s eyes and to make them more responsible.
Financial independence requires responsability
During a recent election campaign one of our politicians said that he would push for lower interest rates simply because the average Canadian won’t be able to pay off his debt anymore. He suggested a credit card interest of 5%. A wise business analyst countered that reducing the interest rate would not improve but worsen the current debt situation, as most people would be tempted to buy more stuff! He was probably right. Financial independence requires responsibility. Maybe our politicians should wake up and make sure, that responsibility and financial planning will be integrated in our modern day education.