Basic Investing: Debt and Credit Cards

It was cold and snowy outside…but inside was bright and sunny. I can vividly remember the day I got my first credit card. It’s like they were giving away free money at Carleton University campus in Ottawa Ontario. That day in the University Centre is indelibly etched into my psyche for eternity. The freedom and power that I would have in 4-6 weeks with a slick new credit card with an $800 credit limit!

Of course I went out and binge purchased CDs and cassette tapes until guilt eventually set in and I realized I didn’t have a job to pay these off. I may have even gotten a bit sassy and bought a delicious spread of tacos or burritos at the local Lone Star or Local Heroes. There may have been a trip to the beer store too.

The day of reckoning comes when you need to figure out your payments, and you do just enough to cover the minimum. That is how the devious cycle begins. You pay a bit off, then spend more than you pay off, convincing yourself that by paying the minimum you’re not incurring debt and more interest. You are incorrect. I was incorrect and most young people are incorrect. That cycle lasted for years for me culminating in buying my first car on a low interest credit card, because the car loan rates were even higher.

The subtle difference of the times back then and now is that you can actually whip out your card and pay for something in an instant – giving narry a thought to the consequences…just point and tap – and boom, its yours! Lets not even discuss ecommerce and online shopping as that makes it even easier to become distant relatives with your money.

I’ve had numerous credit cards, lines of credit, as we all have – and the best advice I’ve ever heard is to avoid them at all costs, if possible! Back then it was really handy when booking that train ticket back home from school for Thanksgiving, Xmas or reading week. So I guess it’s likely not a bad idea to have 1 with maybe a $2000 credit limit for emergency ticket purchases. They key thing to remember, is that with credit cards – the interest starts to accumulate on your next bill – so you typically have 21 to 25 days to pay off the balance.

The average Canadian has 2.4 credit cards. By contrast the average American has 4 credit cards and access to $31,000 credit limit and carries an average balance of $6,194. That means, just to be able to carry that balance – you are paying $200 per month in interest. That translates to $2400 for 1 year, you’re paying for having that luxury of instant purchase power and carrying a balance of nearly $6,200. Life happens, and always comes with some unexpected surprises. Trying to limit those high interest vehicles is a good first step to reducing your debt.

Always be on the look out for low interest balance transfers also. Some cards offer great transfers and low interest rates when you bring your balance over to them. Best option is to set automatic payments until that low interest period is over, or a reminder in your calendar.

Another great tool that I’ve used in the past, is consolidating debts. Usually when you combine multiple debts like a school loan, credit card, car loan or retail card – your bank will usually give you a low interest rate.

Always talk to your primary and even a secondary bank and know your options. Seems like common sense to me, but I definitely needed to learn the hard way!