Revolving Credit
Posted by Gail | Filed under Credit Wise, Money Management
Once upon a time the only kind of credit you could get was called “installment” credit. You had to make monthly repayments that were designed to have that debt paid off within a certain period of time. So you might borrow $12,000 to buy a new car, with the plan to have that paid off in two years, so your payments would be about $560 a month. You knew exactly when the debt would be gone, how much interest you’d pay, and how much you were making a commitment to repay every month. And you had to have a good reason for borrowing. Lenders were loath to just hand out money willy-nilly. You had to justify your borrowing, which made you think. Those types of loans are still around; your mortgage is one.
Much more popular today is “revolving” credit. Lines of credit and credit cards are the primary examples. You can borrow money, pay it back and borrow it again at your whim. You don’t have to explain anything to anybody. You can use it to buy furniture, a car, food. Unfortunately, you don’t have to think too hard or too long before you go and rack up some debt.
When the personal line of credit first came out – I was there, that’s how old I am – they were offered to those people who were most “worthy.” These were borrowers who had proved they knew how to manage their money. They had a high net worth. They borrowed routinely to renovate their houses, finance business ventures, or invest. They were usually building their assets.
When credit became a commodity, FIs started to “sell” credit. Like a toaster or a handy-dandy wrench, credit became something everyone should have and use. And revolving credit became the name of the game. It had cache. It had style. It had unlimited possibilities in terms of generating interest revenues!
And we bought. Like pigs to slaughter, we signed up for as many different sources of revolving credit as we could. We bragged about how many credit cards we had in our wallets. We talked about our latest venture and how we had financed it with our lines of credit. We fell hook, line and sinker for the idea that an emergency fund was a done deal if we had a line of credit. Hmmm.
That’s not to say that revolving credit is in and of itself a bad thing. Nope. I love revolving credit because it puts me in the driver’s seat when it comes to getting rid of my debt. But I will tell you that it’s not suited to everyone. It takes discipline and a firm commitment to money management to bridle this bronco. Without a firm hand, you can find yourself on the ground being stomped to death by wickedly high interest and a never-ending repayment schedule.
On the upside, revolving credit is one of the best ways to build a credit history and shine your credit score. Used and repaid on a regular basis, it creates a record of positive credit management behaviour, which will stand you in good stead when you need to borrow lots of money for something important, like buying a house. That’s because trust is built through experience, and when a lender can trust you based on your credit history, you’re more likely to be approved and not pay through the nose for the privilege.
The best way to use revolving credit to YOUR advantage is to use a credit card to pay for the necessities of your life, things like groceries and gas. When you charge something, transfer the same amount of money you spent into a savings account set up explicitly for paying off the card. Come the due-date, you can use the money you transferred into your Credit Repayment Account to pay off the card in full. There ya go: you’ve used and paid off your credit, added to your credit history, and stayed in the black. What a concept!
December 29, 2008 at 8:51 am
Very true, Gail. We tried the jars and while they worked it was a job in itself to remember every time to take the money out of the jars when u had to buy gas, get a haircut . So we use one of our cards that has a zero balance( and will stay that way) to buy groceries, gas and “everything else”, which is a preset amount. So unless we want to go hungry by the time month end rolls around, we have to watch the purchases just as hard but it gives us the flexibility if we are running low on gas we don’t have to pray to get back home, if we aren’t carrying any money with us.
Thanks you so much for your support through the year and your no-nonsense advice which has helped us and I’m sure countless others. Hope you had a great Christmas and I hope and pray you’ll have a wonderful and blessed New Year ahead.
December 29, 2008 at 9:10 am
I use my Airmiles MC for almost everything and then come home each day (or every couple days) and transfer the money from my chequing account to my MC. I also enter the amount spent into my electronic “budget binder” to keep my spending on track. This works really well for me.
Hope you had a wonderful Christmas, Gail, and are settling into your new home. Happy New Year.
December 29, 2008 at 10:20 am
What a concept indeed!
And plus you can get points by using your card for free stuff!!!
I haven’t paid to go see a movie in over a year and invite ppl to come with me each time!
It’s a shame for people with no consumer self-control who only drive themselves into the red with a credit card in their hand.
Tammy:
Why pay your credit card every day? Set the money aside in savings account like Gail said! Payment deferral, at 0% interest (if you pay by due date), is a great feature of credit cards. You can keep earning interest on that money until your pay off the card.
December 29, 2008 at 10:35 am
We use our credit card in the same way – we use it for all purchases, track them in excel, and rack up the points while eliminating debit card fees.
The card is paid in full a few days before it is due each month – just in case of a delay in payment processing. We also try to time large purchases to the payment cycle of the credit card – buying a day after the statement date so we have “free” use of the credit card company’s money for about 45 days. I also take advantage of those deals where you double your points or get bonus points whenever practical. My husband has accepted that this is like a sport to me – if we are on a trip he will ask which gas station we can get better points deals on!
Those reward points really add up when you use the card for every transaction. The points can then be used to either get yourself a treat or if the budget is a little tighter they can be used to purchase gift cards or items for gifts or to make a necessary purchase. We recently used points to get a Future Shop card to update our computer antivirus and get discs/zip drives to to complete backups of our data.
December 29, 2008 at 10:54 am
I wish I can say that access to revolving credit has worked for me in the past. The only safe “points” card for me are ones like Shoppers Optimum, and Air Miles, where I don’t charge anything to them, but earn points nonetheless. I don’t think I have had my line of credit paid off since the day I opened it…but I was a student, and living beyond my means. Although it took many years to max it out (maybe 5?), and I paid down chunks at a time, it has always been a debt in the back of my head I feel I can never get rid of. Now I am slowly chipping away at it, and even though there is available credit now, I am sticking with my budget as closely as possible, and not getting back into that hole again.
December 29, 2008 at 11:10 am
But it is hard! This is the first month of trying to exclusively use our credit card for all purchases, keep the money used in a savings account and pay off the bill when it is due. It is giving me ulcers! I hate having a credit card balance eventhough I know the money is there. I don’t know if I can do it again. I am sure this month was the worst with Christmas in there. It took me a long time to teach myself that having a balance – especially one I was paying interest on – was bad. I am having a hard time learning this new lesson.
December 29, 2008 at 12:02 pm
We use the Aerogold CIBC Visa card. We use it for everything (home renovations, furniture, dining out, etc.). Consequently we’ve racked up tons of points. Until our eldest went on to university, we translated the points into return air fare to Calgary from Toronto for our family of 4. Then my husband and I had a return trip to London, England once; another time the points covered 3 return trips from Toronto to Vancouver + 2 nights in 4 star hotels. Now we use the points to fly our eldest back and forth from her University in Halifax. Like Michelle states, we pay everything off a few days before it comes due – using on-line banking. It does take discipline, but if you do it does pay off in spades.
Best wishes to you Gail, for a very happy 2009 for you and your 2 children.
December 29, 2008 at 12:36 pm
Sally~ hang in there! Every new lesson takes practice. I think you’ll find
you’ll like the results in time.
Karlene~you have to creep before you walk – each little bit you pay down
brings you that much closer to being debt free. I’m doing the same
thing here – trying to pay as much as possible each month – it’s a
good feeling to see the numbers drop albeit slowly……
Gail~ wishing you and yours a happy, healthy and prosperous New Year!
December 29, 2008 at 1:15 pm
We use credit cards regularly, and we pay off the balance. But we don’t use them for everything. I prefer to use debit for most things, because I find it easier to keep track of. Our credit scores are good and we already have a mortgage, so I don’t see any real reason to use credit cards exclusively.
Sure, points are nice, but they can be a justification for spending extra money. Thinking about the AirMiles you’re getting instead of the $40 you’re spending, you know? Plus, it’s never free to redeem them – there’s always taxes and fees and so forth. A lot of the cards that offer points charge hefty annual fees as well, so that’s another thing to keep in mind.
December 29, 2008 at 1:34 pm
If there was one class that I was really glad I paid attention to in highschool it was the fluff class called “Lifeskills”. While so many of my friends skipped out on this optional class, I paid close attention to this whole business of how to open a chequing account, writing a resume, proper job interview tactics and most importantly the power of compound interest and credit ratings! This instructor, along with teaching the embarassing subject of sex ed to a class of arrogant and awkward teens, told us that a SMALL credit card gotten right at 18 and used only to buy something simple and fairly predictable like FUEL for the car and then paid in full each and every month was a FREE way to build an excellent credit rating that would make the cost of borrowing for anything big later on alot easier to handle. I can’t believe that I listened, but I am very thankful that I did! I had a kick butt credit rating by the time I was done college! All because of my little card and paying it off on time and in full every month. So getting a small car loan at 21 was easy at a relatively painless interest rate and getting a mortgage at 24 (after the car was paid off) was also not a proplem at the better than the banks rate. (Sometimes I wonder how many people that are in trouble now, simply skipped out on that one hour class that was so important? Or thought they knew better than the “dumb teacher” or that nothing bad could happen to them?)
I sound like I’m bragging, sorry, I just want to illustrate that positive EARLY education can have powerful outcomes, like the power of compund interest.
December 29, 2008 at 2:28 pm
Hi Gail.
I have a quick little question about credit. My husband and I have some credit cards paid off and wanted to cancel them all but one. Someone told us that doing that would reflect negatively on our credit score/history. Is that true?
Thanks.
December 29, 2008 at 3:21 pm
Thanks for the support Catherine! I know I will get there eventually…I had it almost all paid down at one point, and then came the cross-country move (twice in about one year) to throw everything out of whack again!
Making a Net Worth Statement, and seeing the impact of my money going down every month might be one of the only things keeping me sane, when I wonder why I’m doing all of this budgeting and cutting back!
December 29, 2008 at 3:57 pm
Gail, we called our student loan centre and bank today to get the updated daily interest rates on our loans. The upside to low interest rates for us is that an extra $3,000 will be paid towards the principal of our loans this year, and we’ll be at $21K by the end of 2009 with our total debt. I have an excel spreadsheet that shows us how much principal and interest is paid monthly, so we can watch the balances go down.
Considering we started out with $100K in student loans 7 years ago, and a $40K personal loan, we’re very excited to be debt free in 2.5 years. I’m even hoping to be more aggressive this year and pay off more of the debt. I’m sick of it!
December 29, 2008 at 4:07 pm
My Great-Grandmother went her entire life without a credit card. (Of course, right before her wedding her husband won a lottery in England, so that likely helped.
)
Anyways, when I turned 18 I got a rush of people calling to offer me credit cards. That’s the excuse I always used — that my Great Grandmother never had one and I was carrying on the tradition. Sadly, eventually I wanted a credit rating and knew of no other way to get one, so I caved in… But I still can’t believe how many people were banging on my door to give me credit back then.
December 29, 2008 at 5:16 pm
You know, I’ve always wondered why banks wouldn’t let you segregate a savings account into smaller chunks:
Chunk 1 – Payroll Deposit
Chunk 2 – Groceries
Chunk 3 – Pay off Credit Card
Chunk 4 – Save for Trip
Chunk 5 – Save for Car
Something to that effect where it’s customizable and you can somewhat control what money goes where and when. They wouldn’t be separate accounts – it would be ‘fake’ organization; taking the jars out of the equation. I suppose it is the programmer/designer in me that enjoys the sociability and flexibility of the web (in it’s current trend) but I think it could help people sort of focus themselves.
Or even if their savings account would automatically tally up how much a person has spent on a particular thing (e.g. everything from Hartmans and Loeb go under ‘Food’). At least the people who were too lazy to figure it out every month could see where their money was going.
December 29, 2008 at 9:05 pm
A ‘well done’ slap on the back for Jean L. (I find others’ success stories inspiring.)
At the moment I would not be happy with revolving credit. One, the interest rate of about 0.1% APR doesn’t make it worth putting the money in a savings account. And two, I feel I need to be in control of my outgoings till my debt is gone, and I clear any credit card balance the next time I go online.
Oh, and today I am ‘technically’ solvent, as least that’s the way I like to look at it
. I still have US$5,000 in debt but my assets (emergency fund and small automatic monthly investment from a $200 pay rise) are greater, albeit it slightly. At the beginning of 2008, I was US$10,000 in debt, had zero dollars in the bank and the light at the end of the tunnel was a speeding train heading my way.
I absolutely know that I couldn’t be doing what I’m doing without Gail and her common sense methods. So a big thank you Gail and I wish you and your family a happy, healthy, prosperous and joyous 2009.
December 30, 2008 at 10:42 am
Natasha-banks like ING that don’t have service fees will let you have as many accounts as your little heart desires. I know lots of people who have different ones for different savings goals. Plus, I am pretty sure there is software that will tally spending for you-perhaps others have suggestions?
December 30, 2008 at 3:49 pm
Natasha,
Citizens Bank will let you break your savings down into multiple accounts,
We currently have three (plus a chequing account): Everday savings – for mortgage and insurance payments, home maintenance, etc.; Emergency Fund; and Baby Savings – since we are expecting a little one in March. You can open the additional accounts online by yourself after the first one. Also no service fees on savings accounts and no fees on chequing account if you keep $1000 in the account. Also, they only invest in socially responsible investments, which is an extra bonus.
July 17, 2010 at 11:29 am
Hey! Thanks alot for this great blogpost! btw: I have found this site where anybody can get a bank account at an austrian bank: http://www.konto-im-ausland.info/ Hope this is useful for you! Have a nice day