Tuesday, October 1, 2013

Credit Cards Are Cool

We've all had it drilled into our heads... Pay off your credit cards. Your parents told you, tv comercials told you, it is one aspect of credit cards that everyone should know, and yet 1 in 20 individuals in Canada don't think they'll ever be able to pay off their credit card balances. We were all told, but not taught why, and that is the point of this post.

I remember the day that I got my first credit card. I was 18, and the bank gave me a card with a limit of $1000.00. 18 years old, a student, with no immediate source of income, and the bank decided I was worthy of a $1000.00 credit limit. The problem with credit cards, though, is that the credit card companies are very smart and they play off the human psychology of instant gratification... buy now pay later. They fit perfectly with our society of consumerism. We're surrounded by advertisements in our every day life and credit cards allow us to satisfy all our wants now, with the hopes of paying it later. But this is what tends to happen:

I'm out shopping (wait, I hate shopping, but for all intents and purposes I guess that doesn't matter). I spend some money on some jeans, a cute top, and a dress, blowing spending $200.00 (can you buy all that for $200? ...you can tell my wardrob is either 10 years old or hand-me-downs from my super stylish mom).

Anyways, back to the story.

So you spend $200.00 today, and guess what, you don't have to pay for it for a least a month! If not longer! (depending on when you purchased the new awesome clothes on your billing cycle). You don't have enough money that day, but you swear to yourself that buy the time the bill is due you'll have scraped together enough money to pay it of in full. You know, like you're supposed to do.

Then 2 weeks later, you're out with your friends. Dinner, drinks, the club, and a cab home. Before you know it you've spend another $200.00, forgetting about the $200 that you spend 2 weeks ago that you haven't paid for yet.

So finally the bill comes, and you're surprised because you forgot about the shopping spree that you went on that you haven't paid for. You've managed to save $200.00 but you spent $400.00 without realizing it. So you pay what you can on the card, leaving a balance, and you promise yourself that you'll pay you card off next month. Then, before you know it, month after month, your credit card balance starts to slowly creep up and you're charged interest.

So how do the billing cylces of credit cards work?
Well the statement is generated on typically the same day every month, then it's mailed to you, and then you don't have to pay the bill for another 20-25 days after the statement is generated. So it could look something like this:

January 12 - statement generated, everything up until this point is on the bill, everything purchased after this date is due on the following bill (February 12).
January 19 - receive the bill
February 2 - the bill is due --- at this point you only have to pay what you bought up until January 12, not the balance that you currently owe, as all your purchases from January 13-Feb 2 will not be due until the next billing cycle.

Interst, so what? I only carry a small balance.
Well here's the thing that most people don't realize. You don't pay interest on just the portion that you do not pay off at the end of the month. You pay interest on your average daily balance from the bill. So for example:

January 13, 2013 - the day after your bill was generated, you pay tuition on your credit card and it cost $10,000.00.
February 12- your statement is generated and you owe $10,000.00
March 2, 2013 - you have *almost* all of the money, but you're just short $100.00. You pay $9,900.00. I mean the interest on $100.00 shouldn't be that much. Wrong, you've carried a balance of $10,000.00 for your entire billing cycle. Even though you nearly paid all of it off, you're charged interest on that $10,000.00.

So then what do you do? I mean what happens if you're soooo close to paying off the bill, but you just don't have enough money? Well although carrying a credit card debt, and paying debt with debt is not the best thing to be doing, and you should really be living within your means, this situation can happen to even the best of budgeters. Although some people may not agree with this, I would prefer to pay the least amount of interest if possible. I work hard for my money! So this is when you need something as back up. A line of credit, or a second low interest credit card. Although paying debt with debt is not the best case, and should not be used every month, it can really save you money. You can pay off that last $100.00 with the line of credit, or the lower interest credit card,allowing you to pay your bill in full, thus avoiding interest on that $10,000.00, and only paying interest on the number of days that your line of credit or your lower interest card carries that $100.00.

However, a couple of things to be aware of if you have to do this:
1) You want to pay off that $100.00 ASAP, as with cash advances, unlike with purchases where there is a grace period where you can pay by the due date and avoid interest, on cash advances you pay interest from the moment you advance the funds.
2) Do not to this with a regular credit card, cash advance interest rates on a normal credit card are much higher. Most banks have a lower interest credit card, some with a small annual fee, these charge the same lower interest on purchases and cash advances.

Ok, so now you`ve gotten me totally messed up, and why would I ever use my credit card? Well credit cards can be useful:
- When you're young, if you use them properly, you can build up a good credit score to purchase a home.
- Some have rewards attached to them. We have a travel one that has already paid for itself 10 times over.
- Cash management, the grace period of not paying interest gives you time to plan your payments around your pay cheques. If your current billing cycle doens't match up, just give your credit card company a call and they can align your cycle so that as your pay cheque comes in, your bill is due a few days later.

I don't want to say avoid a credit card, because I use mine for every single purchase. But hopefully this opens your eyes to how they work, and why you need to pay it off every single month.

1 comment:

  1. Wonderful post Jennifer, never mind for the young adults, it was great advise for your "youngish" Aunt,