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Staying out of the credit card muck

Besides owing money to a loan shark, credit card debt is the worst.

Besides owing money to a loan shark, credit card debt is the worst.


Credit cards are a convenient way to pay for things whether you can afford them or not.


The truth is, if you don’t carry a balance, and if you charge an item to your card, you’ve got 30 days to pay it off without paying interest on the purchase. If, however, you can’t pay off the balance your credit card company will charge interest, typically 17 to 22 per cent.


Remarkably, many store credit cards charge even higher interest rates—some in the range of 28 or 29 per cent. If you charge a purchase on your credit card while carrying an existing balance, there is a 21-day grace period before you’ll be charged interest.


Because of high credit limits and the temptation to spend, a balance can accumulate quickly and it’s difficult to pay off for four reasons: high interest rates; credit card companies set minimum payments between two and six per cent of the outstanding balance (or $10, whichever is highest), which barely covers the interest charges on the card; interest is calculated daily, not monthly; as you pay off your credit card balance, your minimum payment declines because it’s set at a percentage of the balance. Because some consumers pay only the minimum payment, this extends the time it takes to pay it off.


Suppose you go to Vegas and charge $1,000 on your credit card at 19 per cent interest. The minimum payment on the bill is likely two per cent of your total balance, or $20. If you were to stick to paying only $20 each month, it would take you 100 months to pay off that $1,000. Even worse, you’d pay $997 in interest.


Deal with credit card debt by having only one card, reducing your credit limit and by paying a little extra each month, and in higher frequency.


Owing money on a credit card is financially lethal, forcing us into a situation where we are continually paying for the past rather than investing in the future.

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