As Canada's population ages, the country is facing a looming financial crisis that doesn't garner…
It’s Financial Literacy Month and this is the finale of a two-part series to help learn how to take charge of your finances. You can read Learn How to Take Charge of our Finances Part I here. In the previous blog, we covered budgeting and financial goals. Next, we’ll tackle making informed decisions on how you use and repay debt. You’ll learn:
- How to be a smart financial consumer; and
- How to borrow money wisely.
It’s all about knowledge. The more you know, the more successful you’ll be at managing your money.
Be a Smart Financial Consumer
Know Your Rights and Responsibilities
As a financial consumer, you have the right to know how your credit card works and what you are paying. Your credit card provider is responsible for providing this information. Review the details you received upon account opening, such as annual interest rate (APR) and how it is calculated, the grace period, and all applicable account charges.
For example, have you assessed an annual fee? There are many cards that do not charge annually. Knowing such information allows you to make educated decisions about your use of credit. Of course, along with rights come responsibilities. The biggest responsibility, of course, is to pay back the money that you owe.
Aim to pay your credit cards in full each month. If you, like many people, find that your credit card balances are growing, or that you are at, or exceeding your limit, you need a plan to reduce or eliminate your debt.
A credit card can seem like extra money. You make $60,000 a year and between three credit cards, you have $20,000 of available credit. That’s $80,000 to work with, right? Certainly not. But it’s a mindset that can tempt you to spend above your means and extend your payments into perpetuity. Big mistake.
Pay More Than You Have to
You can pay the minimum amount. It will, of course, take longer to pay off the amount due, but it keeps the creditors at bay. It also increases the amount that you pay out– by a lot. When you increase the minimum amount, you not only pay off your debt sooner, you’ll save a fortune in interest charges.
Consider the scenario below:
Example: You have an 18.9% APR credit card. The minimum monthly payment is 3 percent of your balance.
Which repayment option is representative of your current budget approach?
|Option 1||Option 2||Option 3|
|Approach||Pay the minimum amount monthly||Pay the minimum and $50 extra monthly||Pay the minimum and $20 extra monthly|
|Time to Repay||19 years and 9 months||5 years and 2 months||8 years and 8 months|
|Time Saved||—||14 years and 7 months||11 years and 1 month|
Can you imagine going to Disney World in 2019 and still paying for it in 2039? Making the minimum payment in the hypothetical, you would repay over twice the original amount and it would take nearly 20 years! By increasing the minimum payment by $50 monthly, you save five years and over $3,000. But even if you couldn’t stretch your budget that much, just $20 more yields significant savings of both time and money.
Borrow Money Wisely
When to Use a Credit Card
As a smart financial consumer, your goal may be to pay your credit cards in full each month. But sometimes you have a need that extends beyond your current budget, like, say, a refrigerator on its last legs.
If you have time, save for the purchase. If the need is immediate, however, you might consider using a lower interest line of credit. You might also snap up a zero percent introductory APR on a new card, perhaps by the appliance store, if offered. Weigh this option carefully, however, if you’re trying to get out of debt. A credit card should be your last resort for extended financing.
There are times, though, when it makes sense to use a credit card:
- Protection: Your credit card offers rental car insurance, purchase protection, lost baggage coverage or other benefits.
- Improve Your Credit Score: If you use credit responsibly, your activity is reported to credit bureaus and it will help your score, which can lower your interest rates.
- Travel: Use a no-exchange fee credit card for hassle-free travel abroad.
- Fraud Protection: A credit card is safer for online purchases since it doesn’t provide a direct line to your bank account.
If you are unable to pay off your credit cards monthly, consider consolidating your debt. Do you have a card with a lower APR and sufficient available credit? Call the issuer and request a balance transfer. This allows you to consolidate debt under a lower interest rate so that more of your payment goes toward reducing the debt rather than toward interest. Be sure that you call and cancel the card(s) you are no longer using.
What if you don’t have a lower interest rate card? If you have a solid payment history and sufficient income, the second option is to request an interest rate reduction on a current card. You won’t know until you ask.
The third option is to transfer your debt to a line of credit or personal loan. Typically, these types of loans offer lower rates depending upon your credit score. Creditors also look at your income and total debt.
How much do interest rates matter? Consider our previous scenario of a $5,000 balance at 18.9 percent APR. At 14.9 percent, you’d save $1,400 and pay off the debt two years earlier.
Your Finances, Your Future
When it comes to your finances, it pays to be an informed financial consumer. If you’ve followed the tips in this two-part series, you’re well on your way. Once you have a budget in place, your prudent decisions on the use of credit can help you stay on course for the long haul.
What if you need more help? If your credit cards are maxed, you’re missing payments, or you’re using your credit card to pay bills, you can still recover. Call the professionals at Adamson & Associates to set up your free, no-obligation consultation today. The sooner you get started, the sooner you’ll be able to take charge of your finances and learn how to take charge of your finances. Don’t let another Financial Literacy Month pass you by.