François Bégin

By François Bégin

November 17, 2016

Money

The Credit Card Trap: How to Escape It

Article revised on 17 May 2018

“Buy now, pay later!” Sound familiar? If you take a little look around, you’ll see that you are surrounded by credit card offers and payment facilities encouraging you to buy something right away, without having to worry about paying for it. Credit is becoming an easy method of payment!

If you use a credit card on a regular basis, it is all too easy to fall into a trap. I’m not saying that all credit is bad. Far from it! We need credit to purchase high-cost items, such as a home or a car. Credit becomes dangerous when it is used for general commodities (clothing, restaurant meals, gas, groceries, leisure activities, travel, etc.).

Before using credit to cover your day-to-day expenses, ask yourself the following question: If I don’t have the money to buy this item today, what makes me think I will have it tomorrow?

Unfortunately, my instinct is to tell you that if you are not sure of your answer, you should immediately put the item back on the shelf and think carefully before buying it.

In an upcoming column, we’ll consider the importance of saving up for something you want to buy: a reflex that’s definitely worth developing!

Your credit card: the minimum payment trap

The credit trap mainly stems from the fact that you are not forced to pay the full balance of your card at the end of the month.

Most credit card issuers request a minimum monthly payment that’s equal to 3% of the balance. You might be inclined to only pay this really low amount. In the meantime, interest accrues on the balance.

Be careful! The minimum payment decreases over time. Therefore, it will take you 10 years to clear a $1,000 balance on a credit card with an 18% interest rate if you only make the minimum payment each month.

The following table will make it easier to understand: 

Number of monthsCard balance Minimum Payment (3%)
1$1 000.00$30.00
2$985.00$29.55
3$970.23$29.11
4$955.67$28.67
5$941.34$28.24
6$927.22$27.82
7$913.31$27.40
8$899.61$26.99
9$886.11$26.58
10$872.82$26.18
.........
119$12.22$10.00
120$2.40$2.40
$1 789.85

Now, take the same card and make a monthly payment of $30. It will take you a little over four years to clear the balance. Much better, even though the payment period is still fairly long. For this reason, it is important to pay the balance in full every month, to avoid having to pay interest charges!

To escape the credit card trap, the first thing to do is limit your credit card use and only use one card if you have several. Then, refer to my 5 tips for getting out of debt once and for all.

Lastly, to get out of debt and establish effective saving strategies, the best reflex is still to consult your financial security advisor for expert guidance, based on your situation.

Start saving now!

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