Wednesday, July 18, 2012

Rule #4 Never Carry a Credit Card Balance... Ever

"Money is just the poor man's credit card" - Marshall McLuhan.

This one is super easy. Nobody is going to say its a bad idea.... If you do think its a bad idea, you may need your head checked.   Carrying Credit Card Debt to the point where you start paying interest, especially when you have access to cheaper interest rates, is a no-no.  I just did a quick search online and the lowest rate I could find in Canada was about  a 10% annual interest rate.  The majority of the standard credit cards, including the ones we have, charge about 18%.  And if you get a Sears, Canadian Tire, Home Depot credit card, or any other Non Visa or Mastercard, you end up paying 22-28%.  But Ryan, my monthly payment is so low, why should I be fussed about paying it off?  Because its two to five times the interest rate you could be paying if you just got a regular line of credit at 5-7% and moved the balance over.  Or better yet, save your money first and then buy it without having to borrow.  We generally never pay interest on something that depreciates in value (another rule I will write about later) so we almost never carry a balance on any of our credit vehicles.  We view it more as emergency credit.

Okay okay, some people won't save, or want to make purchases before they have the money.  Lets assume you do decide to borrow money to buy something on a credit card and let it ride from month to month. What is the comparison on the amount of interest you pay? Lets say you bought yourself a washer and dryer and it cost $1000, or maybe a hot tub for $5000, or how about a motorcycle for $10000.  Here's what you'd pay in monthly interest for an 18% credit card vs a 6% Line of Credit:

Quite the difference. Remember this is interest... the first 15, 75 or 150 bucks you pay each month on that credit card just goes to servicing the interest...As opposed to the Line of Credit amounts that are one third the credit card rates.  If this isn't a no-brainer I don't know what is.  Use a credit card to buy stuff, and then each month flip the complete balance over to a Line of Credit or better yet pay it off. Easy Peasy.  Don't you feel like a dumb-ass now for buying that motorcycle on credit card and NOT moving the balance over to your LOC?  If you ask me, paying that kind of interest, for consumer items that are worthless within a few years, is the beginning of the death spiral for your finances.

A note about introductory incentives... I once got a card from Sears just so I could get a smokin' discount on some patio furniture. Once I got the bill I paid off the balance and then canceled the card... That card had a 28.8% interest rate.  I kept getting solicitations for opening another card with Sears for years after that... I was in the vortex of their mailing and phone list just for signing up that one time... and I like my privacy... so now I wont even get a card for one of their promos.  They are just looking for a way to rope you into that mega-interest rate.

We use our credits card quite regularly for their convenience - mostly so that we don't have to bring money with us for bigger purchases when out and about, but we always pay them off within a week of making the purchase so that we are in the grace period where no interest is tacked on to the balance... This grace period is something like 21 days but there is nothing stopping the credit card companies from changing that, OR more likely if its not paid off right away I would forget about it and eventually get charged.

In the last 10 years, we have used our credit cards every month, but have not paid 1 red cent in interest on those cards.  We never ever leave a balance on them.  Ever.

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