Give Yourself Credit

DOLLAR$ AND $EN$E, July 2008, by Brian Bogaert


Give Yourself
CREDIT

credit card 


I’m going to touch on a subject that an 11 year old reader in Peace River Alberta wrote to me about: Credit Cards! Last issue we looked at making interest on invested money – getting your money working for you. The other side of that, borrowing money and paying interest, is just as important.

I’m sure you’ve all seen credit cards and some may even have one of your own. They are one of the most misused financial tools and for many adults and kids they are a huge source of financial pain. If you can master the concept of how credit cards really work now, you will avoid potentially massive credit issues in the future!

Companies (like banks) loan money to people and charge them interest. One way they do this is through credit cards. Basically, the Bank loans you money to buy things and you pay them back at a later date. Credit cards are a quick and easy way that Banks can loan you money. If you pay back the loan in time (usually 30 days), then you don’t have to pay any interest. If you don’t pay in time, you pay a LOT of interest on that money they loaned you.

Let me give you an example.
I have $50 in my wallet and I have a credit card that allows me to spend up to $500 (credit cards have ‘limits’ that state how much you can spend). I find a pair of pants that are $100 and a shirt that is $50. Without a credit card I would have no choice. I only have $50 so I could afford the shirt and wait to save up for the pants. With a credit card, I can buy both – even though I don’t have enough money. This is where people get into trouble.

Some people THINK they have $550 to spend because they have $50 in their wallet and $500 on their credit card. We forget to consider the fact that the $500 is a loan... we have to pay back the Bank or else they will start to charge us a bunch of interest as a penalty.

So here’s what often happens…
Not only do I buy the shirt AND the pants, but I put BOTH on the credit card and throw in a pair of $50 SHOES TOO because I believe I “still have money on my card”. I spend the $50 in my wallet on dinner and a movie and I feel pretty good in my new duds!

Three weeks later I get a statement from the Bank that says I owe $200 for my credit card purchases and I have to pay it back in a week. Say I only have $75 as I’ve spent the rest. What do I do now? Well, there is a great deal called the ‘minimum payment’ and it’s much smaller than the full amount. The Bank only requires me to pay that ‘minimum payment’ which is usually something quite small like $20. Who wouldn’t choose to pay $20 instead of $200?! Duh, no brainer right? NO!!

The problem is, the remaining money that you owe ($180) is going to be charged a very high rate of interest starting the day after you were supposed to pay it. This interest rate can be upwards of 28% or higher! Suddenly your $200 outfit could cost you $250 after a year. Not such a great deal now is it?

Would you have actually paid an extra $50 when you bought it?! No way! Yet this is exactly what people do if they don’t managetheir credit cards properly!! It could mean they paid double or more for what they bought!

That’s crazy right?… so why do people do it? Because it’s easy and they get ‘instant gratification’. In other words, they get what they want and they don’t think about how they will pay for it later. They want the fancy clothes!

Money Tip #7
If you don't have the money to buy it, don't buy it. Borrowing money to buy things makes other people rich, not you.

Banks are smart.
They wouldn’t offer credit cards if they thought people would pay the full amount every month. They wouldn’t make any money (interest) that way. They count on the fact that people won’t have enough to pay the full amount at once. People are often so busy that they don’t check their accounts and don’t know how much extra they are paying. If they did they may be shocked and never spend frivolously again!

So what can you do?
First, don’t be in a hurry to get a credit card. If/when you do get one, use it for emergencies only. My rule used to be – if I don’t have the money in the bank to pay the full amount, I don’t buy it! Later, when I started to use a credit card, I always made sure that I knew how much money I had and I only spent what I knew I would be able to pay later.

Another rule -
ALWAYS pay the full amount that the Bank says you owe. Don’t even LOOK at that minimum amount… it’s just trouble. On top of that, if you don’t pay on time or enough, other companies can find out and make it difficult for you to get other things like a house mortgage, a loan or a car lease. But that’s a topic for another day.

Lastly, NEVER lend out your credit card to friends, siblings or anyone. You may be really careful with what you buy but others may not be. That friend may THINK they will pay you back but who knows… they may not be able to and then you are the one in trouble.

~Brian


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