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Recently, before my granddaughter heads off to university, we had a conversation about credit cards: use, abuse, mixed messages, and the choices she’s been exercising since pre-adolescence. Prior to our discussions, I reflected on current economic challenges and the credit card hoax: Society tells students they need a credit card (“the Card”) to build a credit rating for quick, critical credit access. Parents agree, don’t teach or practice responsible card use, kids use cards like parents, and the debt cycle traps them.
Sadly, we do not see the contradiction in our views on credit. The first sub-prime debacle resulted in financial institutions demanding and then lending money to people with bad credit! Lately, have you heard advertisements for vehicles, furniture, appliances and other consumer goods? To maintain or increase sales, merchants lend to almost anyone! Christian ministries have also entered the fray: they encourage donors to lend, regardless of ability to pay!
New Credit Card Regulations
Introduced in 2009 in the United States and in September 2010 in Canada, they require greater transparency from card issuers. protect card user. Canadian regulations mandate an effective minimum 21-day interest-free grace period for customers paying the balance in full. But my favorite rule that applies in both countries requires credit card statements to show the repayment term if consumers pay only the monthly minimum payment. It will shock some users to learn that their monthly payment is worth a lifetime, Debt-punishment!
judicious credit card use
Will the rules help? Probably not. Card users need a behavioral change to use credit cards wisely: old fashioned save-then-buy. Use the Prudent card to pay off the balance in full monthly; Misguided, costly usage leads to monthly balances. Perhaps the first step towards discontinuing the use of credit for consumer goods could be a Prepaid Credit Card. Banks provide them Loaded With Money–essentially they are cash cards–a credit check is not required because the card must be backed by a cash equivalent of each purchase. If people want to avail a minimum of 21 days credit (in Canada), the next step is to convert the credit card into a cheque. Here’s one approach:
- Get a low limit card, like $500
- Open a bank account, deposit $500
- Make arrangements with your bank to make payments from that account on due dates, the full monthly card balance
- Monthly, top up your bank account with the amount withdrawn by the bank to pay for the previous month’s charges
In the first month, if you charged $300, which the bank paid out of your account at the beginning of the second month, deposit $300 to restore the balance to $500, leaving $200. Repeat cycle. Linking your credit card to a bank account from which the bank pays the full monthly balance was standard practice in Japan when I lived there in the mid-90s. Today in Canada, most banks will agree to this process if requested, but are unlikely to offer it.
Beware; Unless you differentiate the two parts of each spending decision — establishing the need, and then deciding how to pay for the item — the merchant’s tempting financing offers will ensnare you. Plus, unless you work with a budget, or a spending plan, you’ll be spending more than you would using cash–estimates are as high as 30%! If you don’t make a purchase plan, and you don’t pay the balance in full monthly, you can’t afford a credit card; Use cash or prepaid cards. Do you know how much interest you paid on credit card debt last year? so far this year?
Copyright (c) 2010, Michelle A. Bell, Ontario, Canada.
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