Credit Cards: The Biggest Baddest Boss of them all

Don’t get me wrong. I ❤ my MBNA Credit Card. But I use it as a free short-term loan. That’s it. I never carry a balance as it is always paid off every month. ALWAYS. No exceptions. To be fair, if everyone used credit cards the way I do, credit card companies would cease to exist. But I’m sure there are worse things that could happen to society in general.

So the Level 2: Debt cheat is to never EVER carry credit card debt. No buts or what ifs about this. You can never get ahead financially if you’re carrying credit card debt. Guaranteed. Some have mentioned that I’m against debt; I’m not against ALL debt, but am definitely against credit card debt.

So how do credit cards work? Aside from lending you money at the worst rate possible?

Month 1: Say you put $1,000 on your credit card this month.

Month 2: Assuming 20% interest rate on the credit card (which is not unreasonable), you now owe $1,016.67. Eh, not too bad yet. Say you spend another $1,000.

Month 3: As a result the balance on your credit card, everything that you charge last month is also subjected to the interest rate; a common misconception is that any new charges receive the interest-free grace period. This is only true if you do not carry a balance. As a result, you now owe $2.050.28.

Say this continues for a year. At the end of the year, you will now owe $13,382.86. You only charged $12,000, but you now owe the credit card company $1,382.86 for the pleasure of using their card and buying things you couldn’t afford to pay for cash in the first place.

Another way of looking at this is asking yourself, how much money do you need to make to pay off a balance of $1,000 that is put on a credit card for a year?  Let’s assume you are in the 25% tax bracket, and you have a credit card interest rate of 20%. What if I said you needed to make $1,630? Over 1.5 times what you would spend on that credit card? (You make $1,630, the government takes $455, and the credit card company will take $219).

So if you are beyond Level 2 in the Financial Well-being video game, congrats! If you do have credit card debt, stop using it! Cut it up if you have to. Try to pay it off as soon as possible as this is most likely the most expensive debt you are carrying. Do your future self a favour and make this a priority; if you can’t pay off your credit card debt off every month, you shouldn’t be using a credit card at all.

I need your help! As this is a new blog, please spread the word on facebook or twitter! The more the merrier!