# Maybe cut your 'credit' card interest cost by 1/3 ... or more???

joyfulguyMay 20, 2006

Hi all,

Suppose you wanted some goods at a store but, lacking cash to pay for it, you accepted their generous suggestion that they'd be glad to issue you one of their "credit" cards and that you could "pay" for the item using their card.

Did they happen to mention that, the minute before you used that card, you had no debt - but the minute after you used it, you were in debt?

A so-called "credit" card is actually a "debt" card - it provides you with a really easy way of getting into debt, almost without really realizing it.

Did they happen to mention that the rate of interest that you'd be paying on that debt would be, usually, in the neighbourhood of 28%? That is, for every \$100. of debt, you'd have to pay them annual rent of \$28.00 (if the debt ran for a whole year, which, of course, they don't allow).

Not my idea of a good way to fly.

Suppose you were to apply for a regular credit card and be accepted.

The annual rate of interest that they usually charge on unpaid balances is about 18% - i.e. 10% less than store-issued cards charge: a reduction in your rate of over a third.

To calculate the difference if the full amount of such a debt ran for, say, 5 years, enter "1.28 X (debt amount)" or 1", then press "=" 5 times, enter amount into "M+". Press current "Clear". Enter "1.18 X (debt amount)" or 1", then press "=" 5 times, enter amount into "M-", then press "M Recall" to get yourself a surprise, I'll bet. Your cost, if you were paying equal amounts monthly - which you wouldn't, as monthly required payments would reduce as the amount owing did - would be about half that.

Call the 800 number for the store-issued card people and ask them whether they charge a penalty for paying off balances early (almost always not: but there will be administrative and possibly other fees if their offer was for 0% for a specified period) and whether there's a fee for balances transferred out (usually not, I think - but, if they do, quite likely the company that's to be assuming the balance will pay it).

If you check around, you may find that one or other of the regular card companies may be offering a 0% rate on transferred balances (for a limited period, of course - after that the rate rises to their usual level).

Changing from paying 28% a year to 0% (for a period of almost surely less than a year) ... is a whole lot better than to a rate of 18%.

But be careful - usually the new card agreement provides that your total payment goes toward paying off that transferred balance before anything can be used to pay either interest or principal on new purchases.

Let's say that your period of no interest was to be for 6 mos., that you transferred \$1,000. of earlier debt in to the new card and paid it off over the course of those 6 mos. And had paid no interest relative to that balance.

However, suppose during that period you'd charged \$1,000. of new purchases on that card. That increasing balance would have been sitting there with no payments made, but accruing interest at their regular rate, throughout those months.

Which means that, once again, your whole balance owing is accruing interest fee at their regular rate.

So, while I suggest that you avoid putting new purchases on that card, to avoid the interest charges on them, if you had another regular card and charged those items on them, you'd likely be paying about the same rate, so it would be about as broad as it is long.

My strong suggestion is that you try strenuously to avoid charging new non-essential stuff on either one of them until the debt is paid, making a serious effort to avoid buying things until you can pay cash for them.

Don't forget - if you can avoid buying a \$185. item for a year, you'll have \$18.00 cash in your pocket that you can use to buy something else, rather than having lost it to interest. You were making monthly payments throughout, so the whole amount was owing for only one month.

If you follow the principle of, "I just have to have it *now*!!" - the stores and credit card companies will be glad to accomodate you ... for a (stiff) price.

About half of the people who use regular "credit" cards pay off their balances owing in full each month - so they pay no interest at all.

I like them apples better.

If you have any questions about these issues, come to ask - someone will have a useful answer for you, I'm sure.

I hope that you have a really happy, creative, innovative time through the rest of spring.

ole joyful

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greg_h

Did they happen to mention that, the minute before you used that card, you had no debt - but the minute after you used it, you were in debt?

If you're going to get technical, then everyone is always in debt. You use your electricity before you pay for it. You make a telephone call and are in debt to the telephone company until you pay the next bill. It is the same with credit cards. In reality, nobody considers it a debt until after the bill has been issued.

I understand what you are saying, but it is still a credit card, not a debt card.

May 23, 2006 at 2:05PM
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joyfulguy

Hi greg,

On the hour after the power meter is read, I become additional debtor to the power company when I turn on the light switch, above the amount that they'll bill me for in a few days. And expect to be paid for, without delay.

An extended delay

finding cash to pay

is mostly

costly.

My point above did not relate to the people who pay off their accounts monthly, but to the amount of extra cost contracted for by the people who chose not to do so and that often without their having given much thought to its ramifications.

My point was to indicate how they might be able to reduce such a cost substantially.

ole joyful

May 24, 2006 at 8:49PM
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greg_h

I totally understood your point, and agreed with almost everything you said. My only problem with your message was calling a credit card a 'debt' card. It makes them sound evil, whereas they are merely a tool. Used properly, they can be a great asset. But of course they can also be used improperly.
I don't like it when people blame credit cards for their financial problems. The credit card didn't make them spend money that they don't have. They did that themselves.
I know somebody whose 'child' (ie. college-aged) recieved one of those starter credit cards where the limit is only \$500. The parent was okay with that, because how much trouble can you get into with such a low limit. But then the card company upped the limit and the 'child' maxed out the credit card. The parent was furious at the credit card company and she ranted and raved about how they were preying on her child. No blame was pointed toward to 'child' who actually spent the money. I couldn't believe it.

I use credit cards properly. I put everything I can onto them and use very little cash. This way, I have an extremely accurate record of everything I spend which makes budgeting easy. And I recieve 'reward' points for every dollar I spend that I can use to get free stuff. I pay off my cards every month, so this benefit costs me nothing.
Recently, when I bought a house, I needed to buy all new appliances. I used one of those store credit cards that would allow me to put off paying for a year. Yes, I was charged a \$50 financing fee, but having that money sitting in my savings account for a year earned me more than \$50 in interest, so I came out ahead. I then paid off the full balance at the end of the year.

Credit cards are merely tools that can be used for good or evil depending on the wielder.

May 26, 2006 at 11:18AM
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joyfulguy

Greg H,

Your message tells me how you are managing ... debt.

Wisely, yes.

It's still ... debt.

D-E-B-T - a four-letter word! Cut it whatever way you like, it's still debt. Which can be become a *serious* problem when it's misused.

That you are obligated to pay - even if you get a temporary lay-off, or with certain specific skills no longer in demand, a pretty well permanent one, or suffer permanent disability, or have a kid who subsequently develops a need for \$50,000. worth of uninsured medical care - or even die.

There's only one way you can avoid it - go bankrupt.

Which steals from other folks who gave you services in good faith, from which you walked away. Some do that several times - walk away ... smiling.

The message was, as I said earlier, not directed to the likes of you or people anywhere near as smart as you when it comes to managing money.

Like, maybe, your friend's kid who, though s/he was in college, wasn't too smart when it came to money management. A local Canadian financial consultant complains that they don't teach much about it in school. If the corporations, including the financial ones, get their feet more heavily into the schools, there'll probably be even less. In his book, he offers advice on how to make a rate of return of 40% or better on your money - guaranteed.

Proviso - you can only make that (before-tax) rate on store-issued credit cards whose balance you pay off.

Maybe, had your friend's offspring not been willing to pay attention to his/her parent, as being out of the dark ages when it came to instructions as to wise ways to live, s/he'd have listened to you had you offered some advice.

The reason for making the point about it actually being a debt that was being incurred when you use the card was to try to get some people who know much less than you about money management to begin to think about it somehat differently.

The point of the message was to show them how they might reduce their cost somewhat if they followed a different pattern than some may have started through following the easy path of signing up for a store-issued card.

I approached it with some trepidation, for I was advising ... taking out an additional card. Which could (too?) easily have a major debt run up on it, as well - leaving the holder in a deeper hole than previously.

Should I become aware of that result springing from advice which I had given, it would trouble me greatly.

Much more concerned than I was about complaints such as yours - which I hear about half of the time that I make this point.

By the way - you didn't say that I was wrong - you just said that everybody does it, right?

By the way, elsewhere in the message, when I was not dealing with the specific issue of the debt aspect of the card, I referred to them without using the quotation marks.

Your country - government and people - is drowning in debt. And digging the hole deeper, daily.

Good wishes to you for wise management of your money - and assets, Greg.

ole joyful

May 26, 2006 at 2:06PM
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greg_h

Actually, my country is the same as yours.
I'm a fellow Canuck.

Have a good day,
Greg

May 29, 2006 at 9:40AM
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joyfulguy

Greg,

Sometimes we do jump to unwarranted - and erroneous - conclusions, don't we, Greg?

At least our crowd are running balanced budgets - well, theyy have been.

Doesn't it seem ironic that, when Chretien, for whom I have little love, took over - there was that huge debt and large deficit.

And - guess who - Paul Martin, finance minister, was given the thankless job of putting our financial house in order.

Which he did, including a lot of belt-tightening (and belly-aching), as you may recall).

For two generatins that family had wanted a P.M.

Finally, after recruiting his pals for years to fill majkor party positions ...

he got it.

Pulled a goof of major proportions.

Poor Paul - now he's gone.

Now - with surpluses - the "Con" guys are back in.

Think they'll run up large deficits again?

Who knows ... probably - given a minority govt.

Life just ain't fair, is it?

Have yourself a great week, fellow Canuck.

ole joyful

May 29, 2006 at 7:24PM
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