Credit has become so much a part of our lives that we don’t even give it a second thought
In the 1850s Isaac Singer wanted to increase sales of his sewing machines. Very few people could afford to buy them outright. His plan allowed buyers to put $5 down and $5 monthly. Today peoples’ credit histories are a critical reflection of their ability to be trusted.Granting credit has grown into an extremely competitive multibillion dollar industry. The target? Our wallets, usually starting with our young people! Get them and dupe them early they say….
So let’s dissect Lila’s (the comic) situation for educational purposes.
Frame 1: Mistake 1: Making only the minimum payment. Lila is prolonging her debt free date, mortgaging her financial hopes and dreams for a pleasure that happened already. She is unwittingly enriching the coffers of the bank. She is the customer the bank likes the most. She makes her payment on time but hardly touches the principal. She will be the first customer the bank will grant a credit limit increase, even without her asking.(By the way Lila, that is BAD news.) Putting consumables such as meals out or a vacation on credit is one of the worst ideas if a person regularly carries a balance. You are paying for that past pleasure far into the future. Also did you know that you can charge more than your credit limit?(What is the meaning of limit? a client once wondered to me). If you do spend beyond your limit guess what! You’ll be charged a hefty fee.
Mistake 2: Using credit card cheques entails a fee, besides the usual interest charges. Like a cash advance (NOOO!), the interest clock starts ticking immediately. Purchases, however are granted a grace period as indicated by the due date on the statement.
Mistake 3: Applying for a new credit card. 3 cards should be the maximum anyone would need. Beyond that there is opportunity for decreased discipline and increased temptation, not to mention keeping track of all those statements, due dates etc. Every time a person applies for credit an inquiry is registered on their credit history. Too many inquiries in a given time frame are red flags for a potential lender. This could lead to either a declined application or an increased interest rate. It goes without saying that the more loans or credit a person has the more reluctant a lender will be to advance further funds. If funds are advanced they will want to compensate for the increased risk by charging the borrower more.
Frame 2: Mistake 4: Is Lila really getting a 0% interest rate? One subtle way companies get people interested is to promote the low rate. In reality few people qualify for 0%. Lila will incur a one time fee to transfer her balance to a new card. She should ensure that ******** fee does not outweigh the benefits of a lower interest rate. There are potential for more charges in either the annual fee, increased late penalties, or no grace period. Credit cards with rewards are notorious for little noticed fees. Note Lila has a special introductory rate. Has she determined when the introductory period will end? Has she read the fine print to determine what the usual rate is? Does she know that the low rate could be converted to the usual higher rate if she makes even one late payment? Has she figured out if she will still have a balance on that credit card at the end of the introductory period? If not she could end up paying more interest than if she had stayed with her first credit card. Also the low rate usually only applies to balance transfers NOT purchases or cash advances. If Lila wants the maximum advantage on the new card she should only use it for the balance transfer, and pay it off before the introductory period is over.
Mistake 5: Looking only at the interest rate and not considering fees. Most credit cards come in two flavors. High annual fees low interest rate. Or low annual fees high interest rates. Which one do cardholders prefer? Which one is better for your bottom line?Don’t get me wrong. Credit can be a great advantage. However, you have to become the customer the bank hates. The customer they NEVER offer a credit limit increase to unless you ask for it. Here’s an example of a good use of credit debt. You buy an MP3 player on May 1 with your FasterCard. You take it home download some tunes and have a good time. You get your FasterCard statement on May 25. The due date to pay the balance is June 15. On June 15 you pay off the entire balance. FasterCard has lent you the money for six weeks and you haven’t paid a cent of interest. Plus you’ve enjoyed your new toy for quite a number of days before you’ve even paid for it. You don’t care that the interest rate is 18.99% because you pay off your balance every month! However, if you pay even one day late because you forgot (I’ve been guilty here), interest will be charged on the entire balance.
Lila should also be aware that the more you owe on a number of credit cards, the greater the chance the interest rate on any one of them will increase as creditors charge a premium for taking on more risk. That is why it is very important to look at your statement for more than 20 seconds a month.
So what can Lila do to become the customer the bank hates?
- She should value her credit and become familiar with her credit history through Equifax or Transunion. Identity theft is one good reason why a person should be familiar with their credit history. Inaccuracies are able to be corrected. (But don’t access your file too often.)
- All of her revolving credit should be below 30% of the maximum available balance. For example if the total of her credit card limits is $15,000 she there should be only $5.000 charged at anytime. (see 3)
- She should avoid maxing out her available credit, for more than a few good reasons we’ve already discussed, and because it could negatively affect the appearance of her credit history.
- Make all payments before the due date.
- Do not go to a credit repair company especially if she values her financial health.
- Type of credit with outstanding balances may negatively affect her credit score. See 6.
- She should not apply for new credit as already discussed, with the exception of applications for a mortgage or car loan as long it’s within thirty days of the last inquiry.
- Opening new credit accounts and closing accounts with a long good payment history could adversely affect her credit score.
Why all the concern about Lila’s credit? I would suspect she has a problem with debt and if she does she is not alone. A study done by TD Bank in January of this year stated that debt is 120% of AFTER tax income. The National Post stated that the savings rate is 0 the lowest since the Dirty Thirties. Presently we’re looking at just under 5% (Q2 2006)
An increased debt burden leaves you with life problems, you know the problems of life: increased interest rates, job loss, relationship breakdown, inability to work, or even less important events like a hot water tank blowing up or having to take time of work for an unforeseen event. An interesting characteristic of these hiccups is that they are entirely unpredictable! After all this you are probably thinking that the credit card game is a lousy one. Well there are two actions you could take. Don’t play or better yet turn the rules to your advantage.