What You Don’t Know Can Hurt You!

People have all kinds of misconceptions about credit cards that end up biting them in the butt. If you’re going to use any tool to your advantage, you’ve got to read the instruction manual first. You wouldn’t start up a chain saw without having a look at the safety warnings would you? So you shouldn’t be so willing to whip out that credit card without looking at the safety rules first.

Most credit cards come with a grace period that’s somewhere around 21 days. But that only applies if you pay your balance in full. Leave so much as a one-dollar balance and you’ll be charged interest on all your purchases back to the day they were made or posted.

Low interest cards are another carrot. But if you don’t make at least your minimum payment within 30 days of your due date, you’ll watch your rate skyrocket. It can take eons to get that great rate back, if you ever do.

Payments aren’t always applied in the order of your purchases. While you may have bought those shoes before you took that cash advance, there are different rules for different types of transactions. You’ll have to get out your magnifying glass and read the mouse print to see how your card distributes your payments.

Promotional rates don’t last forever. As soon as the promotion period expires, your card will revert to its usually much higher rate. A 1.7% rate may look good now, but if you’re going to end up paying 24.99% later, that balance transfer may not be such a good idea. If you’re being offered a special rate, make sure you mark the expiry date on your calendar – and have the balance paid off – before the big guns come out.

Perhaps the biggest myth that will end up hurting you is the belief that your credit limit reflects what you can afford to spend. There is no co-relation between how much you can afford and how much the credit card company will offer you. Regardless of the limit you are given, it is up to you to spend only as much as you can afford to repay. And the best way to know that? Already have the money in the bank before you whip out your credit card to pay. Failing that, you’re revving up that chain saw without your safety gear on, and you should be surprised if that puppy kicks back and cuts off something you never intended to trim!

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Gail Vaz-Oxlade

Gail Vaz-Oxlade wants YOU! Join MyMoneyMyChoices.com to get smarter about your money and help others get smarter about theirs. Isn’t it time we eliminated financial illiteracy? Come find me on Google+ and on Twitter.

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19 Responses to “What You Don’t Know Can Hurt You!”

  1. I don’t even read all the details that come with a credit card because I do what Gail says. I already have the money in the bank before I use my credit card to pay. This way there’s no interest to pay, no worrying, and no real necessity of reading through all that small print.

  2. I’d love to say I was responsible when I got my first credit card, but I was young and no one was pointing me in the right direction. But I learned and while I pay off my consumer debt, I look at ways I can save money so I can use that “extra” money to pay down my debt. One of the biggest things is seeing that the bank I do business with is offering a .97% interest per month on all balance transfers for 6 months. I worked it out and I’ll be a couple months over the 6 months in paying the card off, but I’ll save a lot in interest and I’m working to cut corners in other places so I can get it paid off even faster. Plus the new card has a lower interest rate normally than the one I am transferring from.
    1. When it comes time to buy new shoes for work (cuz I’m on my feet all day and they wear out pretty quick) I’ll stop by our kids shoe dept instead. I’m a size 9 in Ladies which is a size 6 in kids. I pay only 5% tax instead of the 14%. The shoes are marked cheaper and I get a 25% discount.
    2. I usually spend $200 on groceries and then whatever I need for my cat and the occasional trip to Tims. I cut out $ 40 from that budget and am using $40 a week on groceries and $20 goes to my cat a month, $20 to go for Tims a month. Am I going to use all of that? Course not, whatever is left over goes back on my credit card or my jar for laundry, and I start the process all over again.
    I look at my budget weekly and see where I can tweak what in order to make the better use of my money so I can get the balance paid off quickly. I’m still waiting for the card and to know what my balance is, so I can only hope it is high enough to cover the transfer from the other card.

  3. I haven’t applied for a new credit card in absolutely eons. I pay my balance in full every month, so I don’t really care what the interest rate is or how/when interest is applied. When my husband and I were first married, we discussed how to use our credit cards, and we agreed that nothing goes on the card unless we had the money in the bank to pay for it. We also for a long long time, never put anything on the card that we didn’t “own” afterwards (so no restaurants, no clubbing etc.). We have abandoned that 2nd rule in favour of earning points on our cards…but we still fall back on rule #1. Don’t put anything on the card unless the money is in the bank to pay for it!

  4. I’ve used balance transfers when I’ve had to make large purchases. I’ll put the purchase on one card with a high interest rate but I get cash back on it, then transfer the balance before the due date onto another card. The promotional interest rate was usually around 0.99% with no fee for transferring balances (watch out for those 0% offers that charge you 1% up front).

    I save the money that I would have used to pay off the balance in a high interest savings account (more than 2%) and then always pay off the credit card before the promotional rate expires. It really made a difference with purchases of more than $2000 or so.

  5. I was most responsible with my credit card when I first got it at 18. In fact, I was better with money in general when I was younger and single. But then I had kids and any time I needed to get a break I went out for dinner or out for a pedicure or shopping… I started carrying a balance on my card. 18 year old me is now kicking my butt for being so stupid.

  6. Last fall I received an offer on my credit card that tempted me. They offered me $35 if I placed a total of $600 on my card in the month of Sept. I use my card very infrequently and do not carry a balance so I could not see any real downside. In retrospect I now realize that what they were doing was using me to get money from the merchants on fees. Needless to say it is January and I am still trying to get my $35. They tell me that the “cheque ” is in the mail! Right!!

  7. I use to have one credit card but COSTCO will only take debt or Amex so I got an Amex. I pay it off in full when the bill comes. I got a SEARS card for something maybe to make orders. I get tried of beening asked if I want the store cards, ect…. It really bugs me that I needed to get these cards to make full use of the stores I shop. Now, I’m exposed to even higher credit fraud risk, theft, ect… I really wanted only one card to have to worry about when it comes to security, even losing it. It has a high credit limit in case of an emergency which I have the the cash to back up. I don’t go over much of 2 grand on it and I pay it off in full every month. That was more than enough credit for me.

  8. @tammy – It’s probably a good idea to have 2 credit cards. I have a MasterCard that I get my points with, and then I have a no fee Visa from the bank that is my ‘just in case the other card doesn’t work’ card. We had an issue where our MasterCard was compromised, and we needed to make a larger purchase. Our new card would not be coming for a few days, so the Visa saved us. We don’t have any department store cards, they just bulk up my wallet!

  9. Also some places only accept MC or Visa. I remember trying to get a police check for a volunteer thing and they only accepted MC, when I only had my Visa on me. Luckily I had my dads debit card and was able to use that (I also didn’t have my own debit card on me).

    I keep a highish credit limit on my card since the main reason I have it is for large purchases or traveling. For example I will be using it to pay for my sister’s flight which is going to cost around 5 grand.

    I will admit we used the balance transfers when we were paying off the credit card debt. We worked to pay off the balance before the promotion was over. I also paid for low interest on a card because I knew it would be some time before we paid it off. Once it was paid off I cancelled the fee and the low interest rate.

    Sad to say due to not having enough savings (depleted in Sept with a medical expense) and a few unexpected expenses in December (not Christmas related) we currently have a balance on a credit card. After a month of living frugally any extra money will be put towards that. Hopefully before the balance is due.

  10. I have one main card for most transactions that we have set up with the bank to automatically pay in full on the due date.(need to have the funds available for this to work of course). I also have a very low limit card, the lowest they will provide, that I use for situations that seem less secure – parking meters, online purchases etc. This seems to work well for us

  11. Also keep in mind that if you get a credit card issued from your own bank, they have the right to take a payment right out of your account without your consent if you are maxed out or miss payments. They can also put a lean on the assets at that bank. This has never happened to me personally- but I know of someone it has. NEVER get a bank issued credit card if you are irresponsible with credit!!!!

  12. @Colleen
    I would say you should ONLY have a credit card from your own bank if you tend to be irresponsible with credit. Why would you advise someone to avoid this so that the bank can’t get what is owed? People don’t need ways to build up debt without paying it back on time.

  13. Rae;
    even Gail says it isn’t a good idea to have a CC with your bank that you deal with on a regular basis;

    http://www.gailvazoxlade.com/tips/consolidated_banking.html

  14. I have 2 credit cards as well – one I use all the time and pay off in full and the other simply as a backup.

    I would also recommend checking your credit files at least once a year to ensure everything is on the up and up.

  15. I used to be the poster boy for how not to use a credit card ……. I think I’ve done every bad example you can imagine. But that was then, this is now

    I’ve been following Gail for a number of years now and I’ve embraced the process. Took awhile but for over a year now I no longer have any consumer debt. I use the card sparingly, I use a shopping list, the cash is always in the bank and i pay it promptly ……….. The Bank is not my friend … and I don’t like them much either

  16. I have four credit cards (three were just given to me by the bank) but one single credit limit – four card, one credit limit. I mainly just use one, the one that gives be cash back. I clear the amount each month, so I’m not concerned about the interest rates, and the bank gives me credit on the card. The annual fees are waived, so basically I use the cash-back card as a charge card and the bank pays me a small sum for using it. I’d be daft not to take their money. But I guess that comes with having a good credit score, which I got thanks to following Gail’s advice on getting out of debt.

  17. When my husband and I were looking to change over to one low limit cash back credit Card instead of the 3 we had before, I decided to read the fine print to see what the catch was. One mbna Card we looked at included a clause that allowed them to sell our personal information and sales information indefinitely, even after the accounted closed. I can’t imagine signing up for a lifetime of telemarketing and junk mail just to get 4% cash back for 6 months. We decided to go with a cash back Card through our bank with a 2% return on gas, groceries, etc. and 1% back on everything else. The money comes in November, so it is ready for Christmas. Always read the fine print because you never know what you are really signing up for otherwise!

  18. I have two credit cards, a Scotiabank VISA and a Costco Amex because they don’t take VISA. I haven’t paid a dime in interest in over a decade. For the VISA, I paid $54 in annual fees for two cards for my wife and I and at the end of the year, I got $550 cash back. Seems like a good deal to me. The Amex, like Tammy, is only because Costco doesn’t take anything else and I even got $40 or so back at the end of the year even though I barely use it.

    When you never pay interest, credit cards are fantastic.

  19. I have one prepaid travel MC that I use for my big trips so I can just transfer the money that’s already in the bank for flights, railcards and stuff when I’m there etc. I also have one guaranteed MC – rebuilding my credit history – which I pay as soon as I make the purchase online. I only use my cards for online purchases or while travelling, the rest of the time I use my debit card or cash. I learned my lesson from years ago and now use credit wisely, thanks to Gail!! ????

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