It still amazes me when I talk to individuals and they tell me they outstanding balances on their credit cards. Do they not realize these cards charge over 20% interest on their purchases? Why on earth would you want to keep any outstanding balance at all on a credit card. That’s just making all your purchases even more and more expensive.
The notion that people feel comfortable taking on debt by spending money they don’t have is quite appalling. Canadians used to be the most conservative bunch with their money, but with low interest rates, I guess we’ve all forgotten how to save money for a rainy day.
Credit cards are like crack cocaine. It’s addictive. Once you start using them, it’s quite possible to keep spending without realizing just how deep of a hole you could be digging. That’s why there are a few simple rules to follow when using your credit card. Forgetting these rules could lead to a perilous debt spiral that you will never get out of.
Never Spend Money You Don’t Have
Honestly, this is just common sense, but so many people violate this rule. Instant gratification is the name of the game. We want things now and we don’t care how we get it. The basic rule of thumb is to spend money on your credit card as if you were spending cash in your pocket.
Think of a credit card as a convenience for not having to carry cash or change in your pocket. Nothing else. If you don’t have the money in your bank account to cover the cost of your purchase don’t buy it. It’s crazy how many individuals purchase things with money they don’t even have with the expectation that it will be paid off in the future. This is called borrowing from your future self. Stop it!
Never Carry An Outstanding Balance
People think it’s fine to just pay off the minimum balance or the interest on your credit card. IT’S NOT! Do you even know that your credit card carries a ridiculous interest rate of over 20% per annum? That’s like robbery. Only payday loans and maybe your crime boss loan shark has worse rates than that.
Most credit card companies give 21 days of grace before your payment is due. That means from the point you get your monthly statement you have 21 days to pay. If you don’t pay in full, interest gets charged on your purchases on a DAILY basis. But it doesn’t just start at the due date, the interest is calculated back to the date of your original purchase. The moment you miss a payment you’re already paying an arm and a leg for a previous purchase. Heck if you think you got a deal on the shirt you bought, think again. With these interest payments you might as well have bought an Armani shirt with the 40% off purchase you made at The Gap.
Never ever carry a balance. If you have an outstanding balance pay it off completely as soon as possible. Heck take out a loan or a HELOC to make up the payments if you have to. Anything is cheaper than the 20%+ you pay on credit cards.
Don’t Pay A Credit Card With A Credit Card
People think it’s cheeky to do this, but in some regards some people do perform this stunt because credit card companies offer promotions of 0% interest for a limited time period to transfer your balance to another card. This is just procrastination and seriously a recipe for disaster.
The problem is worsened when this is performed without a promotional offer. You think you can get away with not paying interest but it doesn’t work! Cash transfers on credit cards accrue interest immediately. There is no grace period. So stop trying to trick the bank.
Pulling stunts like this with cheques is actually illegal, but with credit cards it’s not. This practice, known as “kiting”, could lead the banks to cancel your credit cards because they may feel that this practice is being abused to run up unpaid balances. Which, in essence, is completely true.
Don’t Spend To Your Limit
I get it. Some people fear losing their cards and someone running up the charges, but the fact is, having a low limit on your credit card can hurt your credit score. Credit rating companies take a look at something call utilization ratio. This means they take a look at the total amount of credit available to you and determine what percentage of that you use up regularly.
If your credit utilization ratio is high, then it hurts your credit score. This can have an adverse affect on your ability to get a mortgage, car loans, or even win over a landlord to get a rental unit.
A good rule of thumb is to keep your utilization ratio under 30%. This means that if you have a credit card with a limit that is only $3000, you should only use up to $900. If you find yourself going over, you can either ask for a credit limit increase, or pay it off immediately when you go over $900. Remember you should be using your credit card as a cash substitute, so you should have money in the bank to cover the balance.
Don’t Cancel Long Standing Cards
If you have a credit card you don’t use, you may be tempted to cancel it. Don’t. Credit cards provide credit history. If you have a card in good standing, with no late payments and dates back many years, then it will help your credit score immensely.
Cancelling your card will mean all of that history will be lost. It’s much smarter to change your card to a no fee card and keep the history, but not use the card. This will help keep your credit rating in good standing.
Use Common Sense
If you find yourself in a credit crisis with your credit card then there’s no cure, but to destroy them. Yes, that’s right. You need to cut them up. Credit cards are probably the number one killer of personal financial health. It’s too easy to borrow money on a credit card and not pay it back promptly.
Our consumerist society has encouraged us to spend on things that we should otherwise not need. Our own need to feel gratified is made so much easier when credit is so readily available. To the very end, we all need to be disciplined when using our credit cards and when used properly they can be great tools in helping us track and organize our spending habits.