‘Til Debt Do You Part

Not all debts are created equal. I am talking about bad debt. Broadly speaking, if you borrowed money to buy something that drops in value immediately, that is bad debt.

Do you have bad debts? Credit card debt? Do you know much are you paying to service these bad debts?

In all honesty, I don’t know what the rate on my credit card is. 

Very Bad!!! Bad me! Maybe…maybe not.

I don’t have debts and I don’t carry a balance on my card. I pay it off by the due date every (almost) month. I can count the number of times on one hand when I have failed to do so by design- once because I went on a crazy buying spree when I worked in Yorkville. A few times I got very busy and forgot, not a good excuse, and once because I did not receive the bill but I paid the amount owed plus what I figured the credit card company would ding me for the time it takes for the payment to be processed and applied against my account. I usually overestimate the amount so the gouging doesn’t continue for another month.

I have a few store cards that I rarely use but I have a Crappy Canadian Tire Mastercard for the convenience and because I figure I can always use the “money” I accumulate on my card from purchases- who couldn’t find something there to buy? If nothing else, I can treat myself to a magazine or more energy efficient light bulbs.

The only reason I wanted a card originally was for emergencies. It also made me feel like a grown-up. My parents didn’t have credit cards for a long time so they would not have sanctioned me getting one- but these credit card companies know how to hook you in university and they got me. You hear horror stories about the monster bills people rack up but I am lucky I learned how to use the credit card to my advantage and not theirs. 

I use it mainly to help me track my expenses and as a kind of small scale arbitrage. Technically, the term refers to the simultaneous purchase and sale of the same security, commodity or currency in different markets to profit from unequal pricing. I use the card for purchases for which I know I have cash in the bank (or will have the cash in the bank by the time the bill arrives). The purchases are put on the card to collect “money”/points and to take advantage of the grace period. During that period, my money collects interest in the bank- not a lot mind you but the pennies add up. And the “free money” is extra bonus fries.

Tell me- who doesn’t like extra bonus fries?

A couple people have tried to tell me that the interest is the price they pay to use their card.

That is absolute bullsh!t!!!

These companies make money hand over fist, making money coming and going. In addition to squeezing as much money out of you as they can, they charge a hefty fee to the stores that accept your card.

Your job is to pay them as little as possible for the “privilege” of using their card.

If paying off your monthly balance is not an option (at all, whatsoever), then you need to look for the card with the most attractive rates. The extras are incidental at this point and don’t even approach bonus fry status in light of the interest you will be paying- don’t kid yourself. Sometimes even asking for lower rates and the threat of switching to another card will result in a lower your rate. If you can’t pay off balances each month, you should be avoiding store credit cards like the plague. The rates they charge, sometimes in excess of 25%, is highway robbery.

Let’s stop and think about this for a second. If you are carrying past purchases on a store credit card and let’s say they are charging you 25% for the “privilege” of doing so, paying it off is like getting a 25% return on your AFTER-TAX dollars.

The Rule of 72 is used to figure out how long it would take ones money to double (divide 72 by the rate of return). An investment with a 25% return would double in 2.88 years (72÷25). In today’s investment environment, that is like hitting a Grand Slam. A math geek will be able to tell you precisely what the actual return from paying off a high rate credit card would be but even with my simple math- that is beyond significant. 

Some people would counsel paying off the credit card with the lowest amount (regardless of the interest rate) so that you feel a sense of accomplishment. If that is what it takes, then go with it.

Some people recommend going to the bank, consolidating your loans into one (ideally with lower interest rates) but you can’t forget to get to cut up your credit card or make it very difficult to use them for an impulse purchase. What is good in theory may not work in practice since the tendency is to max out the cards again and you end up further in debt. But again, it really depends on the individual and this may work for you. 

I would get rid of the most expensive debt first. It is the most onerous and to me, that would be the most satisfying.

If you have impulse control issues, cutting up the cards or freezing them in a block of ice is an option. Hopefully, by the time the ice melts, so will the desire to buy that new George Foreman spin fryer.

For some people, debt is carried around like a security blanket. It can be a great excuse for not doing what you really want to do.

Getting control of your bad debt and debt in general, will be a huge load off your shoulders- but don’t take my word for it. Try it and find out for yourself.

I am a big proponent of options and your options will expand vastly when you eliminate your debt.

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~ by angryegg on December 18, 2008.

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