Category: Credit Cards

Tools vs. Anvils – How to Use Your Credit Card

Credit cards are an exceptionally useful tool if used correctly. However, they can also cause great financial harm when the basic rules of use are ignored.

There are two terms that you should know: deadbeat and revolver. Deadbeats do not carry credit card balances from one month to the next and they reap the benefits of rewards programs. Revolvers are the people who do not pay their credit card bills in full and they have to pay interest and fees.

For the purposes of this post, deadbeats use credit cards as a tool. Revolvers are the people who are carrying the anvils, which are in the shape of credit card debt.

Just in case it needs to be said, banks love revolvers and they really hate deadbeats.

The Tool

Your credit card is a tool if you pay it in full every single month before the balance is due. You can use it throughout the month, happily collecting points (or not) as you spend. When the bill is due, it’s paid in full. This is the only correct way to use credit cards, in my humble opinion. So long as you never pay interest, then I think it’s perfectly fine to use a credit card for all of your purchases.

For my part, I know how much I can spend on my credit card before I pull it out of my wallet. I’ve been tracking my expenses for years. As such, I have a good sense of how much I spend in a given month. It’s around $2,500. As such, I never spend more than this amount on my credit card.

Spending more on my credit card than I earn in one month is a recipe for disaster! Expenses go on my card simply so I can earn points towards free groceries. (If I were coupled, I would use the credit card that earns points towards companion fares. If I could find a free cash-back reward card, then that’s the one I would use on a regular basis.)

There are a myriad of reward cards out there. I don’t really care which one you pick. My advice if the same whether you accumulate travel points, grocery points, free movies, or any-other-benefit-that-works-best-for-your-goals. Pay off the entire amount of your credit card bill every single month.

If you’re never carrying a balance, then I think credit cards are a wonderful tool that should be used with abandon.

My opinion changes drastically if you don’t pay off your credit card every single month.

The Anvil

If you carry a balance from one month to the next, then your credit card is an anvil. It is holding you back from spending your money the way you want to. No one wants to send interest to the bank.

If you are paying interest on your credit card balance, then look at your statement. It will tell you how much extra money you have to pay to cover the interest. So on top of the $100 you spent on your initial purchase, you’ll be spending an extra $9 – $29.99 to pay for your whatever-it-is depending on your credit card’s interest rate. Keep in mind that the interest will continue to compound until you pay the credit card balance in full.

This is how credit cards become an anvil. It’s very, very hard to repay a debt when the interest is over 5%. At double-digit rates, your best bet is to cut up the cards, go cash-only for a year or two, and get a part-time job to pay off the debt.

Get Rid of the Anvil

Cash-only means stopping all subscriptions until the credit card debt is gone. We now live in the world of streaming services, wine-club memberships, gym memberships, online subscriptions of every sort, Patreon & Only Fans account, etc, etc, etc… You don’t have to give these up forever. Far from it! Maybe you have to give yourself a hard “No!” for 6 months. All of those “small” subscriptions add up to a decent amount.

Take the amount of those subscriptions/memberships/fees and add them to your minimum monthly credit card payment. Continue to do make these payments until the debt is paid off. While you are paying it off, do not use your credit card to pay for anything! When you make a new purchase, that purchase will only increase your outstanding debt and it will also be subject to interest. You’ll be working backwards if you continue to make purchases on your credit card while trying to pay it off.

Once you’ve paid off your credit card(s), you can re-start your memberships/subscriptions/fees that you were paying before but only up to the amount that you can pay for in full every single month. If your monthly financial commitments are more than you can pay for in full, then you need to cut some of them out permanently until you’re earning enough money to cover their cost.

Once you’re out of debt, you can continue to use your credit card. You need only follow my 3-step plan for staying out of credit card debt for the rest of your life.

  1. Make a purchase on Day 1.
  2. Wait for it to post to your credit card account on Day 3 so that you can earn your credit card points / rewards. (You can check your credit card account online. I check mine every few days.)
  3. Once the purchase has been posted, make a payment in the amount of the purchase on Day 5.

By the time you receive your credit card statement, you will have paid off nearly every charge from the prior 30 days.

Real Life Experience

I think the interest rate on my credit card is 23.99% per year, or maybe even 29.99% per year. I don’t really know because I never pay interest. In my case, I follow the 3-step process outlined above so that I never pay interest on the balance.

Believe you me, the only time I ever want to see a rate a high as 29.99% is when I’m looking at the rate of return of my investment portfolio.*** When I’m the one earning this kind of return, it’s a great thing because compound interest is working in my favour.

Paying 23% or more on a credit card means that compound interest is working against me and hurtling me down into a deep, dark pit of debt. I don’t ever want to pay this amount of interest to a bank!

I’ve had a credit card ever since turning 18. Thankfully, I knew enough to pay it in full ever since the first day. I’m not the bank’s favourite customer because I’ve been a deadbeat since the beginning.

So take this information and do with it what you will. While I have strong suggestions, you are best-positioned to know the circumstances of your life. You will make the choices that you think are appropriate with the knowledge that I’ve shared. The choice to be a deadbeat or a revolver lies with you. Choose wisely.

*** Interestingly enough, I don’t earn anywhere close to these returns even though my portfolio has a significant weighting in the financial sector.

Could you afford your life without credit?

I love reading about personal finance. It’s been a hobby of mine for the past 20+ years. I’ll even go so far as to admit that I’m also an avid snoop – I love hearing about how other people spend their money.

  • Are they investors?
  • Do they like to be spontaneous with their cash?
  • Maybe their parents or grandparents are helping them out?
  • Perchance they started a wildly successful business?
  • Are they just regular folk trying to survive and have a few creature comforts for themselves?

Want to know what I’ve learned after all my many years of reading about how other people spend their money? Here it is.

There’s a persistently growing group of people who need credit to survive. These are working folks whose paycheques don’t get them from one to the next. No matter how they crunch the numbers, economize, downsize, and sacrifice, they simply don’t take home enough income to pay their expenses.

Take a good look at your finances. There’s no need to share your answer with the class. Just be honest with yourself as you answer this question:

If you had to survive on cash, would your cash run out before you got to your next paycheque?

For Some, Credit is Optional

There’s a segment of the personal finance community that loves to talk about credit card hacking. I’m not an expert so forgive my less-than-accurate description of this financial method. In short, credit card hacking appears to be a process by which cardholders maximize their points for extremely discounted or free travel, hotels, car rentals, etc… These cardholders are diligent about how they use their credit cards each month to maximize these benefits. Most importantly, THEY NEVER, EVER CARRY A BALANCE ON THEIR CREDIT CARDS.

And while travel cards are not my preference, I can certainly see the advantages. I have two friends, each of whom has 4 children. Every so often, my friends like to travel by air for family vacations. Believe you me, they make extremely good use of their travel rewards credit cards. Flight expenses for a family of 6 are very expensive. It only makes sense to use a credit card that will result in one or two of those airline tickets being free or otherwise extremely discounted.

In the interests of transparency, I freely admit that I use a credit card that saves me money on groceries. I use the card – I earn points towards food – I pay off my credit card charges long before the due date. If I had to pay for a gaggle of airline flights, I’d probably use a different credit card.

For Another Group, Credit is a Requirement

There’s another group of people who use credit cards for reasons that aren’t driven by economizing on life’s little luxuries. These are people who need credit because their paycheques are insufficient. They don’t make enough money to pay for rent, food, utilities, and transportation. To be blunt, their paycheques do not cover the basics. It’s not a situation where people have to cut back on cable for a 3-4 months to pay off a debt. I’m talking about those who have already cut their expenses to the bone… and are now digging into the marrow. These are folks who are at the financial bottom, even though they’re employed.

For these people, access to credit gives them a way to survive from one paycheque to the next.

Do not misunderstand me. I am not for one second saying that this a good way to make ends meet. It is not. The rates of interest charged on credit cards should be criminal. However, using credit is the next best way to buy your necessities of living if you’re not able to further slash your expenses and your efforts to earn more money have failed.

I’m going to suggest that those who could live on cash have some empathy for those who can’t. Put yourself in the other’s shoes. Again, no need to share the answers with the class. Just be honest with yourself.

  • Let’s say you’re paid bi-weekly, i.e. every 14 days. Yet your paycheque only allows you to buy 12-days worth of food. What would you do? Would you willingly be hungry for 2 days or would you use credit to bridge the gap?
  • You need your car for work, and it breaks down. There’s no reliable public transportation near you, and your co-workers don’t live nearby. Do you look for another job near home? Or do you use credit to fix your vehicle so you can maintain your livelihood?

These aren’t terribly far-fetched scenarios. People find themselves in these situations every day. When they don’t have the cash to pay for the repair, or to feed themselves, they turn to credit.

Life Can Be Expensive When You Don’t Have Enough Money

Even if you had an emergency fund, there’s no universal rule that life won’t throw you another emergency before you’ve had a chance to rebuild your fund.

Credit provides a lifeline, an immediate solution to a financial problem. The real issue is that the cure is as bad as the disease. For those at the bottom of the economic ladder, relying on credit is just as bad as not having sufficient money to pay for their costs of living.

It’s not a situation of using credit and paying it off in full, while earning a low income. People in that situation could live on cash, but use credit for other reasons. Maybe they’re earning points. Or perhaps they’re building their credit score. At the end of the day, they set aside their cash to pay off their credit card balances in full. Their income may be low, but it’s enough to get them from one paycheque to another. They simply use credit in place of cash, but they never fall into the trap of carrying a credit card balance.

My concern is for those who need to use credit because their cash isn’t enough. Life isn’t getting any cheaper. A few weeks ago, we found out that inflation in Canada had hit 4%. That’s not great, especially when your income doesn’t grow in step with inflation. For those who have disposable income, now they have just a little bit less of it. The people who were just making it from one payday to the next… well, they may not be able to do it anymore. When gas, groceries, rent and utilities all increase, while income stays stagnant, doesn’t it make sense to rely on credit if you can? Even if it’s going to cause problems later on?

Again, I ask you…

…Could you afford your life without credit? Do you earn enough to live on cash?

There are no easy answers when the belt has been tightened as tight as it can go but there’s still not enough money. If I were wise enough to have the answers, I would share them with the world. Like most of the chinwag that emanates from personal financial bloggers, my suggestions and insights are for those who already have money. Solving the problem of people not having enough money to begin with is beyond me.

In a perfect world, incomes wouldn’t have to be supplemented with credit. Paycheques would be enough to cover the survival expenses, to invest, to save for emergencies, and to buy a few little extras. That isn’t the reality for everyone. So as we start 2022, I urge you to have some compassion and kindness towards those who aren’t fortunate enough to have to have extra. Please don’t judge them for the choices that they make. They’re doing the best they can.

Pay Off Your Credit Cards Every Month

During my time on this little blue ball we all call home, I’ve learned a few things. This blog is about personal finance so I’ll limit my comments here to that topic. Today, I’d like to take a look at credit cards. Many people attribute negative associations to these little plastic rectangles. It’s easy to understand why. After all, credit cards allow people to dig themselves into very deep debt-holes.

This is truly unfortunate.

There is another perspective worth considering. It’s that credit cards are a tool when the cardholder pays off their debt in full, every single month. Paying the bill in full every month allows cardholders to accumulate rewards for their spending without every paying a penny of interest to the credit card companies. Is it any wonder that the credit card companies call these customers “deadbeats“?

When it comes to credit cards, I’m committed to the belief that you should pay off your credit cards every month. There are a myriad of ways to do this, but the following three methods are the best.

Automatic Transfers on a Set Schedule

I learned about this method from a dear friend. Sam pays a fixed amount towards his credit card every two weeks, when he gets paid. He’s not a stickler for details and is too busy to check every charge on his bill. (I find this astonishing, but whatever.) Sam never misses a payment, though. He has restricted his credit card limit. His credit card company can’t just raise his limit. They need his permission first. Sam keeps his limit around $3,000 per month. Every two weeks, he sends $1500 to his credit card company. This way, he never goes over his limit and his bill is always paid in full by the due date.

Sam charges everything on his credit card, up to $3,000. Every time he gets paid, Sam makes a payment of $1,500 to his credit card company. Easy peasy, lemon squeezy! Sam benefits from accumulating points on his credit card. He’s staying out of debt. He never pays interest on his credit card charges. I’m suspecting that he’s also building a stellar credit history since he always pays his bill on time.

It’s not my way of doing things, but it works for Sam. Who am I to tell him that he’s wrong?

Itemize, Pay & Repeat

My personal method of paying off credit cards is the Nerd’s Way. It’s more intensive but it’s also more informative. Since the pandemic, I’ve been using my credit cards for all purchase both large and small. I record each purchase in a spreadsheet so I know how much it costs to run my life. A couple of days after a purchase, I log into my bank account to see if the charge has been posted. If the answer’s yes, then I make a bill payment to my credit card in the amount of that purchase. Did I spend $74.89 at the grocery store? Why, yes I did! And did I subsequently make a $74.89 bill payment to my credit card a few days later? You can bet your bottom dollar that I did that too!

I’m a stickler for details. Keeping track of my expenditures bring me a measure of comfort. It reassures me that I know where my money is going. Even if it feels like it’s slipping through my fingers, atleast I know that it’s going where I want it to go.

And much like my friend Sam, I’m earning beaucoup points towards free groceries. (Shout out to PC Financial!) As an aside, I do love free groceries. I need to eat and I’m using a credit card to pay for stuff anyway. In my situation, it makes sense to earn points for food.

Just Pay It Off

This is self-explanatory. When the bill comes in, you pay it. No muss, no fuss.

If you have another good way of fully paying off your credit card bill each month, please share with the class.

In my opinion, there’s absolutely nothing wrong with using credit cards so long as you pay off your credit cards every month. Any of the methods outlined above will allow you to accumulate points and build or maintain your credit score. All three of these methods will work so long as they’re put into practice.

Shopping Season

The shopping season is upon us once again! It used to be called the Christmas season or the holiday season but the notion of Christmas or holidays is no longer emphasized.

When I look around, all I see is the emphasis on shopping. Apparently, the proper and just way to show your love to family and friends is to empty your wallet. Every retailer under the sun is exhorting you to spend-spend-spend! If you’ve got a nickel, they’ll happily take it.

Need a gift for your bus-buddy’s grandmother’s snow-shoveller? Then head over to Staples and find just the right thing!

How about a little something for the hostess’ dog-groomer’s roommate’s twin sister? Surely you’ll find what you need at Tim Horton’s.

And let’s not forget to buy a gift for your neighbour’s chiropractor’s assistant’s step-sister’s tennis instructor’s mechanic’s first mother-in-law, okay? Surely, the perfect gift is just waiting to be found on Amazon.

I jest…but not by much.

Gift-giving expectations have exploded.

When I was a child, it was way back in the dark ages. People read by candlelight. A full-sized chocolate bar cost $0.05. It was a 10-mile walk to school, both ways uphill. Back then, a seasonal greeting was sufficient and no one expected anything else.

Today, the retailers have brain-washed us into believing that we should spend whatever it takes to buy something for everyone that we know. It’s insidious! What if my neighbour’s chiropractor’s assistant’s step-sister’s tennis instructor’s mechanic’s first mother-in-law doesn’t like the tin of saltwater taffy that I gave her? I spent $42 on shipping – she damn well better like it!

When we buy into the notion that everyone needs atleast one gift from everyone else, then we tacitly accept that money has to be spent or else someone won’t be happy.

Time – the Ultimate Gift

You know what has worked to create better relationships and strong connections? Spending time with people. Playing cards & board games, completing a puzzle together, or hosting a potluck allows for people to share their lives, talk about their dreams, laugh together, and make some good memories. Time is priceless because it is finite. You only get so much of it and it’s best not to waste it.

When you choose to spend time with someone, you’re giving them something precious. You can’t buy time, but you can use it to create spheres of intimacy where you, your friends and your family can just be. In today’s world, where the constant demand is to do more, be more, spend more, achieve more, one of the best gifts of all is creating a space where it’s okay to just chill, to simply relax, to be together with those whom you cherish.

I’m not trying to pretend that you don’t need some money at this time of the year. If you have to travel or you’re making something that’s not on your regular grocery list, then funds will be needed. If you’re hosting out of town guests, then you’re going to need some extra funds for the additional costs of running a household with a few more bodies. I don’t want to give the impression that this time of year doesn’t deliver some solid punches to your pocketbook.

However, I do want to disabuse you of the notion that buying stuff is the way to find the kind of relationship that you want. No one wants to feel like they’re simply a wallet-on-legs. You want to feel appreciated, not taken for granted. Going into debt to buy gifts for other people is not the way to create the genuine relationship that you most truly desire.

Spend cash! Spend cash! Spend cash!

If I can’t convince you to cut down on the number of presents that you dole out, then perhaps I can persuade you not to go into debt to do so. Keep the credit cards out of your wallet – don’t take them to the mall – most definitely do not use them online! If a website already has a copy of your credit card information saved, then go an delete it immediately. You need to slow down the speed at which you spend your hard-earned money. I call this slowing down process “financial friction”. You will need to create some friction between your viewing of an item and the purchase of that item. Friction will impede your ability to go into debt during the shopping season. This is a very good thing!

Trying to buy someone’s love is a bad idea. Going into debt to buy someone’s love is an even worse idea! If your plan to buy affection doesn’t work, then you’re in debt while also failing to get what you really crave from someone else.

At the root, everyone wants the same thing. People really want to be accepted and loved for who they truly are. They want a genuine connection to others and to know that they are cherished. Your wallet can only buy stuff – it cannot buy the intangible elements of a wonderful relationship.

After all, if your relationship is based on money, then what’s left if the money goes away? How do you know that you’re loved for who you are rather than for what you can buy?

As hard as this may be to believe, I have nothing against gifts! I enjoy giving them and I enjoy receiving them. What I’ve learned over my years is that the amount spent doesn’t correlate to the importance of the relationship in my life. The people in my life love me after shopping season is over, whether I’ve given them a $2 garage-sale mug, a tin of homemade baking, or the latest fancy electronic toy. Tossing aside my financial goals and going into debt to buy gifts for other people hasn’t resulted in stronger relationships.

Look, I’m not telling you to stop buying gifts. I just want you to think about why you’re buying gifts. And I’m going to gently suggest that you spend a little bit less this year in presents. Those who really and truly love you won’t stop loving you if the box under the tree is slightly smaller this year.

Trust me on this one.

Credit cards everywhere!

Earlier this week, I went shopping at Canada’s last remaining national department store. I’ve been searching for black pants for the past few months and I had some time to kill between appointments so I took myself shopping, an activity that I normally hate very much.

To my very pleasant surprise, I found the pants that I was looking for and they were on sale for $29.99. Hooray for Blue Lobster! Exactly what I wanted at a price that I was willing to pay. Does it get any sweeter than that?

So I took my awesome find to the till…and the credit card tussle began.

The cashier asked me if I had a last-remaining-national-department-store credit card, which I’ll refer to as the LRNDSCC for simplicity’s sake.

I said that I did not.

She asked me if I wanted to apply for one.

I said “No, thank you.”

At this point, she gave a look that very nearly had me checking my shoulders to see if I’d grown another head.

The cashier doubled-down. She told me that I could save 15% on my purchase if I were to apply for a LRNDSCC that very moment.

Again, I replied “No, thank you.” And then I threw her for a loop. “I don’t need any more credit.”

I thought she would faint, but she held it together. That cashier indicated that it wouldn’t take but a minute and she repeated that I would save 15% on my purchase immediately.

Once more, and with a smile, I told her “I don’t need any more credit.”

At that point, she stopped pushing the credit card. I have assume that, during her cashier training, she’d been instructed to keep pushing credit until the customer had denied it three times.

She was so perplexed by my refusal that I almost felt sorry for her… until she asked me for email address. I told her I didn’t want any email. She started to tell me that providing my email would allow me to get notice of sales and special offers. I just shook my head. Still reeling from my denial of credit, that hard-working cashier simply gave up and rang up my purchase.

Why not accept the credit card offer?

I thought about this a lot on my drive home. It’s a bit more complicated than the fact that I don’t need more credit. Tis true – I don’t need more credit. I have plenty and it’s sufficient for my purpose. In a certain respect, credit is like dish soap. Why would I use more than I need?

The other reason I didn’t accept the offer was because I don’t believe that the reward was worth the risk.

Risk, Blue Lobster? What risk is there in accepting a store credit card?

Well, there’s the risk that my information will be compromised. The more cyber locations housing my personal information – name, address, social insurance number, salary, etc – the more opportunities for Bad Guys to steal it and engage in identity fraud against me.

Limiting the number of creditors with my information offers me some measure of comfort and control.

Check this out – 37,000 customers from Transunion have had their information compromised. This is not a good thing. I might already be one of those unfortunate customers, so I’ll have to keep a close eye on my credit cards to ensure that my financial identity remains safe. I suggest you do the same thing too.

On a purchase of $29.99, I wasn’t willing to increase the risk of identity fraud simply to save $4.50. Fortunately, I had the extra $4.50 in my budget to make the purchase without impacting my ability to pay for shelter, food & my bare necessities. My choice to spend the additional $4.50 means that I won’t be taking on the risk that Bad Guys hack into the credit card information of the LRNDS and steal my personal information.

The third reason why I didn’t accept the credit offer is simply because having credit in my wallet means being tempted to spend on that card. Why put myself in a position of temptation if I don’t have to?

The 15% discount was a one-time thing. Again, I would’ve saved $4.50 on a pair of pants if I’d accepted the offer. Yet, I would have a shiny new piece of plastic winking at me from my wallet. And the sole purpose of that new little item would be to put me into credit card debt.

So how many credit cards do I have?

I have two. They’re accepted everywhere. One is for my day-to-day, and the other is for travelling. Both of them are free. Both of them offer rewards that suit my lifestyle perfectly. Personally, I see no reason to get anymore credit.

While I’m willing to accept that credit cards are a convenient tool for many people, I still think it’s a great idea to limit one’s access to this particular tool. My rules for this tool are simple – pay it off, in full, every single month. If you can’t do that, stick to cash.

Physical currency will buy you the exact same things that credit cards will, and it provides the additional benefit of preventing you from ever going into debt. Cash is still king for a reason.

The next time you’re offered a retail credit card, be brutally honest with yourself. Think about whether you really need it. Will you be tempted to spend on that new credit card? Is the savings of that particular purchase worth the risk of someone hacking your information?

Why Isn’t Credit Card Math Taught in School?

Today, I checked my credit card statement and found out that I have to pay $191.13 by October 10, 2019. The box at the bottom informed me that if I were to make the minimum payment ($10) at my current interest rate, then I would pay off my balance in 2 years and 0 months.

WTF?!??! At $10 per month, it would take me 24 months to pay off $191.13. So, I’d be paying $48.87 (= $240-$191.13) in interest over 2 years. The interest of $48.87 is 26% of the outstanding balance of $191.13. Ridiculous!

I also have to remember that if I make any other purchase during that two year period, then the amount owing would go up. that would mean that my bank would charge me even more interest.

So why isn’t credit card math taught in school?

I remember learning how to add, subtract, multiply, and divide. There were lessons on algorithms, on calculus, on algebra. My teachers spent time on the subject of simple interest, compound interest, and how they differed. I very definitely recall word problems involving distance and time.

Yet at no point during my many, many years of schooling do I remember any lessons on how to calculate credit card interest. Sure – I know that if I don’t pay my bill then I’ll be charged 19.97% annually. But is that compounded monthly or annually on my outstanding balance? Does that rate apply to any fees that I might have to pay if I miss a payment?

Math lessons would have been that much more useful to my adult life if I’d been required to solve the following math problem:

Henry indulged in some retail therapy and charged $7500 to his credit card. If he only pays back the minimum monthly payment of $225*** while being charged a rate of 29.99% annually, then how long will it take Henry to repay his credit card? Secondly, how much interest will Henry pay on that credit card debt? *** The minimum monthly payment is equivalent to 3% of the outstanding balance.

Not My Parents’ Fault

I’m not going to blame my parents for this gap in my education. I’m fairly certain that credit cards weren’t a thing when they were in school. You can’t teach what you don’t know.

Credit card math was never an issue in my house when I was growing up. My parents had two credit cards between them. My dad had a gas card that he used when we took our annual summer holiday. My mom had a retail store card that was used to buy appliances for the house. What they taught me about credit cards is as follows: NEVER CARRY A BALANCE.

Full stop. This is what I learned from my parents’ example respecting the issue of credit cards. This is a basic lesson that pretty much works in all situations involving a credit card balance. Pay your credit card balance in full every single month.

Unfortunately, my parents’ example failed to explain how credit card interest will be calculated for those unfortunate folks who do not pay their balances in full each and every single month. Though incredibly useful and entirely admirable, the lesson from my parents taught me nothing about credit card math.

Surely the Credit Card Websites Have the Answers I Need

Let’s recap. My parents didn’t teach me credit card math at home. My schools didn’t teach me credit card math even though I was in their care and custody from the ages of 6 to 17. Despite receiving my undergraduate degree from the school of business, I never learned how credit card interest was calculated. For that matter, my business degree was also useless in teaching me about the nefarious death-grip of student loans or anything else related to personal finance.

The next logical place to search for answers is from the source. Surely the banks who issue credit cards would have a calculator dedicated to credit card math on their website. It would seem only logical that they would have some kind of online tool that explicitly shows how interest on credit cards is calculated and compounded. Customers would be able to enter their outstanding balance and the interest rate on the card then press a button to get a number representing how much interest would be owing on the outstanding debt.

CIBC offers a credit card calculator to encourage you to accumulate points. There’s not a single mention of how the interest is calculated if you don’t pay your bill in full. To be fair, the inquiry “How is interest calculated on my purchases?” results in a link to the cardholder agreement. Pages 6-7 of CIBC’s cardholder agreement set out how payments are applied to a credit card balance. Yet, there’s no calculator that allows borrowers to plug in their own numbers to see just how much interest they will pay if they don’t pay their balance in full.

I’m not picking on CIBC. I went to Scotiabank’s website too, and they didn’t have a credit card interest calculator either. Similarly, TD’s website was a bust. BMO has a variety of calculators for mortgages and savings, but does not offer any online calculators to help their customers figure out how interest is calculated on credit cards.

Maybe Canada’s biggest bank has what I want… RBC’s website isn’t perfect but atleast it offers an explanation, but not a calculator, of how interest is charged on its credit cards. Kudos to RBC for not making its customers wade through a cardholder agreement!

How disappointing… It’s almost as though the purveyors of credit cards do not want their customers to be able to figure out how much interest they will have to pay on their credit card debt if balances aren’t paid in full. I’m willing to go out on a limb here. I believe that credit card issuers don’t want their customers to understand credit card math.

Even the Gurus Can’t Answer my Questions!

If you’re not yet familiar with his teachings, then allow me to indulge for a moment. Dave Ramsey has created a series of Baby Steps to help regular people get out of debt and to achieve wealth. To be clear, I love the lessons about how to get out of debt by creating a debt snowball. If you’re ready to commit to a get-out-of-debt-plan, then start doing what Dave Ramsey says and keep doing it until all of your debt is gone.

Yet, even Dave Ramsey fails to explain how credit card interest is calculated. This is hardly surprising. He hates debt and he encourages people to never carry credit cards. Still, he’s been in the business of helping get out of debt for nearly 3 decades. I thought that maybe, just maybe, he would be the one to explain credit card math to folks…even if just to tell people that they’re stupid for partaking of it.

Government of Canada to the Rescue!

The good folks at the Financial Consumer Agency of Canada have a partial solution. Their website offers a credit card payment calculator that will tell you how much interest will be charged if you don’t pay your credit card off in full. The calculator lets you add in your current balance and your interest rate. The search results ably demonstrate the impact of paying more than the minimum monthly balance and how much interest can be saved.

So far, this is the best credit card math tool that I’ve found online.

I’m still in the dark about how to calculate interest on my credit card balance. So I will resort to my parents’ wisdom. I resolve to never carry a balance. The mystery of credit card math may or may not haunt me for the rest of my days, and that might be okay.

So long as I pay off my credit card balance every single month, I’ll never need to worry about the box at the bottom of my statement which tells me that it will take 24 months of my life to pay off an amount as small as $191.13 if I make the minimum monthly payment while never charging anything else during that time period.

Give Yourself Some Credit

I want you to give yourself some credit – literally.

Allow me to back up a little bit, to give you some context. A year ago, my credit card number was stolen when someone booked a hotel with my information. Although it took a few weeks, my bank reversed the charges and life went on as normal.

One of the lessons that I took from this experience was to keep my authorized credit card limit at an amount I could pay off within 30 days. I was lucky. The thief only stole enough credit to book a hotel room. He or she could have racked up way more charges since my limit had been around $5,000. I’m not entirely confident that my bank would have made me whole if the stolen credit amount had been to the max of my credit limit.

Luckily, I’m the kind of person who checks all of my bank and credit balances every few days. That’s how I was able to catch this fraudulent transaction within 24 hours of it being posted to my account.

Protect Yourself with Lower Limits

After this unfortunate event, I lowered my credit card limits. I have two cards, although I use one more often than the other. The first card is for transactions like buying gas, dining with friends, tickets for entertainment, and my monthly bus pass. It’s the card I use for my regular life. The other card is for travel, so it has an even lower credit limit. Should my card be compromised while I’m away from home, the potential damage is much lower. There’s less credit for a thief to steal.

You may want to consider lowering your credit card limits if they’re more than what you could repay in a month. If a Bad Person uses your card fraudulently and you can’t report it right away, then you might have trouble convincing your bank to help you get those charges reversed. Until such time as they freeze those transactions, you might have to pay interest on them. I’m not an expert on how banks operate when people experience credit card fraud. Contact your bank and find out what they will do to help you if you find yourself a victim of credit card theft.

Sometimes, a Higher Limit is Necessary

However, there are circumstances where I need a larger credit limit. In my case, I’m getting some house renovations completed before winter. After 18 months of saving money in a designated account, I pulled the trigger and signed the contract. If I were to run the renovation cost through my credit card, there is no way that my limit would be sufficient. A five-figure renovation is more than my credit cards can handle.

So what’s the solution?

Most people would apply for more credit from their bank. This is a bad solution to this kind of challenge. The smart solution is take matters into my own hands by giving myself some credit.

Again, I already having the savings in place for this home renovation. The money is already in the bank. The solution of how to use my credit card to pay for my renovations is to front-load my credit card with the savings that are already in my bank account.

What are you talking about, Blue Lobster?

It’s really very simple. If it’s possible to make payments to your credit card, then it is similarly possible to front-load your credit card with cash. You essentially turn your credit card into a gift certificate.

  • Step One: The money is loaded onto your card, which gives you a positive credit balance on your card.
  • Step Two: You use your credit card as you normally would.

When you need more credit than is currently available to you, then you need to give yourself some credit by front-loading your credit card with cash.

Can I really do that?

Whether you make payments in person or online, you have the ability to apply cash to your credit card. In fact, this is precisely how you pay off your credit card balance each month. (And if you’re not paying off your credit card balance each month, then stop using your credit card. Make payments until the balance is $0.00. Lower your credit limit to $1,500. At that point, you can start front-loading your card with cash so that you can use your credit cards and simultaneously stay of credit card debt forever.)

There’s no law that limits how big that payment is. Front-loading cash onto your credit card results in a credit limit higher than the one given to you by the bank. The front-loaded money is available for you to spend but there’s no concomitant obligation to a lender.

The credit available to you from your bank via your credit limit results in a debt that you owe to the bank at the end of the billing cycle.

The front-loaded cash on your credit card does not yield any debt whatsoever. It is money that is spent for you to acquire whatever it is that you want without requiring you to pay any interest to anyone.

Do you see how my solution is way, way better than getting an increase to your credit limit?

Benefits of Front-Loading Credit Cards

I’m going to repeat myself – give yourself some credit. The benefits of using your own cash to increase your credit limit are awesome.

  • You don’t pay any interest on the money that you front-load onto your card. This is money from your bank account, which means that it is not money that you are borrowing from the bank.
  • You can eliminate the impact of fradulent transactions on your account. Only front-load your credit card a day or two before you’re planning to buy whatever it is that costs more than your credit limit. Do not carry an artificially-high credit limit at all times. That puts you at the same risk of having a high credit limit when your credit card gets compromised. Credit card thieves will steal your money just as easily as they will steal the bank’s.
  • You’ll be far less tempted to spend your savings on stuff that doesn’t matter. The reason you’ve front-loaded your card in the first place is because you’re spending the money on something that’s very important to you. It could be tuition, a trip, a celebration, a piece of art, jewelry, whatever. The point is that if you were committed enough to save up for that purchase, then it’s very unlikely that you will squander your front-loaded funds on stuff.
  • Your credit score is not impacted by the act of front-loading your credit card with cash.
  • Front-loading your credit card is the same as paying with cash without having to carry cash on your person. You are spending your own money, instead of the bank’s, but you’re doing so via plastic. Imagine if my contractor was actually willing to be paid $10,000 in cash. Neither of us would exactly be comfortable flashing a brick of $100-bills around. However, he has no problem accepting my money via a credit card.
  • Front-loading your credit card eliminates the need to pay a bank fee in order to buy a bank draft or a certified cheque. Even with e-transfers, there is a limit on how much can be transferred electronically.
  • Finally, front-loading your credit card prevents you from going into debt. Banks who lend you money want to make profits off of you. They do so by charging you interest when you can’t pay your credit balance in full. They want you to go into debt so that you’re in a never-ending cycle of paying them interest every month. While this is good for them, it’s very, very bad for you.

When you have a credit limit that can be satisfied by your monthly income, then you won’t go into debt. This is due to the fact that you’re in a position to pay off your balance every single month.

Keeping your credit limit low and front-loading your card with cash means that you’ll stay out of debt while still buying the things that really matter to you.

Don’t rely on the banks to control how much you can spend on your credit cards. Instead, give yourself some credit by front-loading your credit cards with your own money.

Freeze your Credit Limit

Recently, I had a discussion with someone who was worried about credit card debt. For ease, Gentle Readers, I shall call this person Oscar.

Oscar’s niece owed over $10,000 on her credit card and Oscar was beside himself! It seemed that Oscar’s niece had been fleeced by an acquaintance who was not repaying the borrowed money and was in fact enraged with Oscar’s niece for not lending out even more money on her credit card.

While the whole situation was bothering Oscar a great deal, I learned that he was most troubled by the fact that the credit card company had increased his niece’s limit without verifying her salary. Oscar somehow believed that the credit card company had acted in an untoward manner! Oscar appeared to be under the impression that the credit card company was in a fiduciary relationship with his niece.

For my part, I was stunned that Oscar would be surprised by the credit card company’s behaviour.

Credit Card Companies make profits, not friends

In case you, Gentle Reader, believe credit card companies act in your best interest, please allow me to clarify the situation for you. Your credit card company has no duty to act in your best interest. Credit card companies are finance companies – they are in business to make money, not friends!!!

As profit-seeking entities, the credit card companies are not going to do anything to stop you from going into debt with their product. Please re-read my last sentence a few times before continuing. Let it sink in. To the credit card company, you are the goose and your feathers are money. They want to pluck you naked.

The credit card companies will increase your limit, charge you interest and fees, and harass you for payment if you don’t pay them back each month. They are finance companies. Their sole purpose is to earn profits for their shareholders by giving you credit so that you pay them back with interest and fees. That is the only service that they are offering you. To believe anything else is to naive and self-destructive. When you go into debt, they make more money.

More often that not, it makes sense for these companies to increase your credit limit beyond your ability to repay the full balance in a single payment cycle. They will do this at a drop of a pin because it’s a good business move for them. Doing so vastly increases the odds that you will be forced to carry a balance and thereby pay them interest at a double-digit percentage.

The credit limit increase is good for them. Conversely, the increase is bad for you. If you are using credit and not paying it off every single month, then you are living beyond your means!!! This situation is very bad because it means that you are living in debt and that you do not have any disposable income to put towards building your cash cushion.

Your Salary is Irrelevant to Any Increase

Credit card companies don’t check your salary before they increase your limit. When you apply for a credit card, you have to state your income. However, once you’ve been approved and issued a credit card, your salary need never be discussed again. The credit card companies don’t care if you earn $1500/month or $25,000/mth. They will continuously increase your limit as often as they can in the hopes that you eventually start paying them interest by carrying a balance from one month to the next.

My wisdom for you is this: your credit limit should never exceed the amount of money that you could repay in a single month. If you have an extra $1,000 per month after all your needs are met, then your credit limit should only be $1,000. You’ll be in a position to use your credit card up to its limit and still pay off the balance without incurring any interest. If you don’t have $10,000 in disposable income each month, then you don’t need a $10,000 limit.

A very smart friend of mine who introduced me to the Disposable Income Method of using credit cards. It’s ingenious and highly effective. I’m sure that the credit card companies hate it! If so, that’s means that you should love it and start implementing it immediately. Briefly, the Disposable Income Method requires you to set your credit card limit at whatever disposable income you have between paycheques. Every purchase can go through your card and you pay your credit card in full each time you get paid. Easy-peasy-lemon-squeezy!

Protect Yourself from Limit Increases

There are two ways to protect yourself from credit limit increases. The first method is to never have a credit card. This method is drastic and foolproof. In today’s world, it’s also quickly becoming unrealistic. Even I use credit cards on a regular basis. However, I never borrow more than I can repay when the bill comes due.

The other way to protect yourself from these increases is to phone your credit card company and to tell them the following: “Do not increase my credit limit without my express request to do so. I don’t need more credit than I have right now. I do not want my credit limit increased without my explicit permission. Please make a note of this conversation in your computer system.”

This conversation works – trust me. I do not want a 5-figure credit limit because I cannot repay a 5-figure debt in a single billing cycle. It has been several years since I’ve seen an increase in my credit card limit. By telling my credit card companies to freeze my credit card limit, I’ve eliminated some of the risk of carrying a credit card. I’ve pre-empted the possibility of spending more than I can repay.

So pick up the phone – call your credit card company – freeze your credit limit. Don’t feel bad or sad or guilty about doing so. Rest assured that the credit card companies will always be there to offer you more credit at very high interest rates. Fret not, Gentle Reader – you can always go into debt tomorrow!

There’s no need to pay interest on your credit cards!

I want you to know that I use credit cards. Frankly, I love the convenience of them. When I don’t have time to run to the bank machine to grab some cash, it’s very comforting to know that I can slide my credit card out of my wallet and still buy whatever it that I need at the moment. Credit cards are a seductively easy way to replace cash when it comes to paying for everything legally available under the sun. There’s no annual fee to worry about and I even earn rewards for using my card. The cherry on my sundae is that I earn points towards free groceries – score!

 

The only negative that I’ve been able to associate with credit cards is the manner in which they facilitate debt problems. In other words, they make it ever-so-easy to get caught in the debt trap. See, when the bank issues you a credit card, the bank sets a limit on how much you can spend. And when you get close to that limit, the banks will increase limit so that you can continue to buy-buy-buy. From what I’ve observed with my own credit cards and the credit lines of others in my circle, the limit that is assigned to your card is completely and utterly divorced from the amount of disposable income that you have each month with which to pay off your credit card balance when the bill comes due. I used to have a $9,000 limit on one of my cards! I can assure you that I do have $9,000 each month that can be put towards my credit card.

 

Credit cards are here to stay. Let’s face it – society is not moving en masse back towards cash. There are the diehards who only use cash, and their numbers are dwindling. The last time I was at the airport, I noticed that passengers must use a credit or debit card to pay for their baggage fees. Excuse me? How is it possible that the words “Legal Tender” don’t apply at the airport?

 

The cornucopia of credit cards is not going to disappear anytime soon, but that doesn’t mean that you have to pay interest for the privilege of using them. Use your credit card as much as you want, but ensure that it is paid off in full by the due date. There are multiple ways to do this.

 

There’s the Traditional Method: the statement arrives, you see the balance, you pay the balance in full. This method is old-school. It’s incredibly effective. I don’t know of a single person who has been charged a penny in interest by paying their credit card balance in full before the due date. The banks lend you money via your credit card, then they ask to be re-paid if you use it. When the bill comes in, you repay the bank their money. Everyone’s happy and you get to do it again the following month. The Traditional Method works like a charm.

 

There’s my Obsessive Compulsive Method. I use my card. I check my account online. When the charge is posted, then I know that I will get the points for my purchase. I then go to my bank account and make an online payment for the charge in full. This method ensures that my credit card statement shows a balance of $0.00 by the time it’s sent to me. The OCM is a bit more time-consuming but it ensures that I don’t forget to pay my bill due to other stuff going on in my life. I have the satisfaction of knowing that all of my charges are paid off before the statement is issued – there are no debts hanging over my head.

 

Very recently, I learned about a third method – the Disposable Income Method. It involves pre-determining how much money from your paycheque to allocate to your credit card each time you are paid. You then tell your credit card company to set your credit card limit at this amount. You also tell them to freeze your credit limit, which means that they cannot raise your limit unless you ask them to. Then you use your card in the normal course and you pay off your credit card in full from each paycheque.  For example, if you know that you can pay $1000 to your credit card account from your paycheque, then you arrange for the limit on your card to be $1000. When you get paid, you pay $1000 to your credit card. You credit card bill gets paid in full and you never carry a balance, which means that you’re not paying interest to your credit card company.

 

This third method has many benefits.

 

One – You never spend more than you can pay off in one paycheque. I will venture to say that most people with five-figure credit limits are not in a position to pay off their five-figure balances in full each month. This is why they carry a credit card balance and why they pay interest on their credit card balances.

 

Two – You will build your credit history quickly. There will be a solid record of you borrowing money on your credit card and paying it back promptly.

 

Three – You can still collect point or airmiles or free food, or whatever benefit it is that you card offers. You can still spend money however you want to, just like you did before. However, you’ve taken the very adult step of ensuring that you’ve prevented yourself from spending more money than your budget can handle.

 

Four – If your credit card is used fraudulently, then the damage that is inflicted is limited to a relatively small amount of money, i.e. the pre-determined amount that you can pay from your paycheque. The criminals cannot go hog wild with your card.

 

And if you’re already in debt, the answer is to stop using your cards. With rates pushing 30%, there’s no way that you can get yourself out of debt while still accruing interest charges on your credit cards. And if you’re paying 30%, then you might as well light your money on fire for all the good that it’s doing you. Paying interest is giving money away to the bank. That money should be in your pocket, not theirs!

 

You’ll need to go on a cash diet, while making payments to your credit card. Pick an amount – higher is better – and pay that amount to your credit card every single month until your card is paid off. Do not make any charges on your card! This means, you stop all auto-pays on your credit card. Why? Auto-pays are new charges, against which interest will be charged until you’ve paid off your debt. You will pay for your life with cash until you get out of debt. And if you have more than one credit card, you will continue this process until all of them have balances of zero. Check out the Snowball Method for detailed instructions on how to get out of credit card debt.

 

Once you’re out of debt, you won’t be paying interest to the bank anymore. You can use your credit cards again, but only if you are committed to one of the three payment methods.

 

All three of these methods work to keep you from paying interest on your credit cards. Pick one of the three methods outline above – all equally effective – to ensure that you don’t pay any interest to the banks. You can even combine them if you’d like. By following any or all of these three methods, you’ll pay for what you’ve purchase and not a penny more!

 

Credit cards are a tool

Anyone who knows me also knows that I hate debt. I particularly hate credit card debt because most cards carry usurious rates of interest if the balance is not paid in full. So this post is for people who pay their monthly credit card balances in full EVERY SINGLE MONTH!!!

If you carry a balance on your credit cards, then this post is not for you. This post will not help you to stop accumulating credit card interest, which should be your priority if you’re carrying a balance. Credit card interest is a cancer that will stop you from achieving your financial dreams so please start working on how to get out from under the burden of credit card debt. Please come back next week when there will be a new post for you to read. 🙂

Credit cards are a tool. They are not meant to charge me interest. Rather, they are meant to minimize my need to carry giant wads of cash as I go through life buying the things I want. The money stays in the bank until the time comes for me to pay for my credit card purchases. At no point should I ever be in the position that the amount of money owed on my credit cards exceeds the amount of money that I have in the bank to pay off my credit card. That is a recipe for disaster!

To those who never carry a balance, please keep reading. I view my credit cards as a tool. (For full disclosure, I collect cash back on one card and travel miles on the other.) I pay recurring monthly bills with my credit card. I put all of my gas purchases on my credit card. I use my credit card to pay for meals with friends and my annual theatre subscription. Truth be told, I really do enjoy the purchasing power that comes with my credit cards.

That said, I never carry a balance. I’m one of those weird freaks of nature who checks on her credit card’s monthly running total every other day. Once a charge has hit my credit card statement and I’m rewarded for my purchase, in the form of travel miles or cash back, then I go to my online bank and send a payment in the amount of my purchase to my credit card. More often than not, I put several thousand dollars through my credit card each month yet the statement’s balance is only for a few hundred dollars when all is said and done.

Why do I pay my credit card charges before they’re due?

I do it because I’m human and I know my own foibles. I do not yet have the discipline to keep large amounts of money in my chequing account. I’ve had the distinct pleasure of only having $0.01 in my account the day before payday. I don’t encourage this but I share my experience so that you know I’m not the sort who can keep a buffer of several thousand dollars in her main bank account! It works best if I make the purchase, i.e. $50 to fill my tank, wait to see the charge posted to my credit card account, and then pay off the $50 immediately. I owe the money to the credit card company, so why not pay off the charge while I have the money in my account? The bill is paid and I never have to think about it again. I don’t have to worry about something unexpected happening in the future which will prevent me from paying off the charge on the due date. I’ve got gas – I’ve got my reward – I’ve paid my bill – life is good!

I can hear you asking – “But what if you need that $50 for something else before the credit card bill is due?”

Should this happen, then I go to one of my other accounts to find the money. Or I cut back on my groceries for that week. Or I decline an invitation to something fun that I otherwise would have accepted. The bottom line is that I borrowed $50 from the credit card company and they will charge me 17% per annum (or more!) on that $50 if I don’t pay them back. Trust me, I would rather miss out on a dinner and a movie that pay than kind of exorbitant interest to pay for my gas.

My bottom line is that my credit cards are a tool that I use to make my life easier. There is no need for me to pay interest on my purchases. My main responsibility is to stay on top of my charge by checking my credit card statement online every few days and by making frequent payments to cover all my credit card purchases. I’ve been controlling my credit cards this way for over 20 years. My system works for me. Try it out – you might find that it works for you too!