Recently, before my granddaughter left for university, we chatted about credit cards: uses, abuses, mixed messages, and the alternative she has been practicing from pre-teen. Prior to our discussions, I reflected on current economic challenges and the credit card deception: society tells students they need credit cards (“cards”) early to build credit ratings for early, significant credit access. Parents agree, don’t teach or practice responsible card use, children use cards like parents, and the debt cycle traps them.
Sadly, we don’t see contradictions in our views on credit. Earlier sub-prime debacle resulted from financial institutions’ seeking out, and then lending funds to people with bad credit! Lately, have you listened to advertising for vehicles, furniture, appliances, and other consumer items? To retain or grow sales, merchants offer credit to almost anybody! Christian ministries, too, have entered the fray: they encourage donors to give on credit, irrespective of ability to pay!
New Credit Card Regulations
Introduced in the USA in 2009, and Canada in September 2010, they require greater card issuers’ transparency to protect card users. Canadian regulations mandate an effective minimum 21-day interest-free grace period for customers paying full balance. But my favorite rule that applies in both countries require credit card statements to show repayment period if consumers paid monthly minimum payments only. This will shock some users who will learn that their monthly payments amounts to a life, debt-sentence!
Prudent Credit Card Use
Will regulations help? Probably not. Card users need behavior change to use credit cards wisely: a return to old-fashioned save-then-buy. Prudent card use pays full balances monthly; misguided, expensive use carries monthly balances. Perhaps a first step to stop using credit for consumer items might be a prepaid credit card. Banks offer them, loaded with funds–essentially they are cash cards–no credit checks needed because the card must be backed by cash equivalent to each buy. If folks want to take advantage of the minimum 21 days credit (in Canada), the next step is to turn the credit card into a check. Here is an approach:
- Get a low limit card, say, $500
- Open a bank account, deposit $500
- Arrange with your bank to pay from that account on due dates, full monthly card balance
- Monthly, top up your bank account with the amount the bank withdraws to pay the previous month’s charges
In month one, if you charged $300, which the bank paid from your account early month two, leaving $200, deposit $300 to restore the balance to $500. Repeat the 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-90’s. Today in Canada, if requested, most banks will agree to this procedure, but they are unlikely to offer it.
Beware; unless you distinguish the two parts to each spending decision–establishing the need, and then deciding how to pay for the item–merchant’s seductive financing offers will trap you. As well, unless you work with a budget, or spending plan, you will spend more than if you used cash–estimates range up to 30% more! If you don’t plan buys, and you don’t to pay the full monthly balance, you can’t afford a credit card; use cash or a prepaid card. Do you know how much interest on credit card debt you paid last year? This year to date?
Copyright (C) 2010, Michel A. Bell, Ontario, Canada.