Recently, before my granddaughter left for college, we talked about credit cards: uses, abuses, mixed messages, and the alternative she’s been practicing since pre-adolescence. Before our discussions, I reflected on current economic challenges and the credit card hoax: Society tells students they need credit cards (“cards”) early to build credit scores for early and meaningful access to credit. . Parents agree, do not teach or practice responsible card use, children use the cards like parents and the cycle of debt traps them.
Unfortunately, we see no contradiction in our views on credit. The previous subprime debacle was due to financial institutions seeking out and then lending funds to people with bad credit! Have you recently heard advertisements for vehicles, furniture, appliances, and other consumer items? To retain or increase sales, merchants offer credit to almost anyone! Christian ministries have also entered the fray: they encourage donors to give on credit, regardless of their ability to pay!
New Credit Card Regulations
Introduced in the US in 2009 and in Canada in September 2010, they require greater transparency from card issuers to protect card users Canadian regulations require a minimum effective grace period of 21 days without interest for customers who pay the full balance. But my favorite rule that applies in both countries requires credit card statements to show the payment period if consumers only paid the minimum monthly payments. This will surprise some users who will learn that their monthly payments are equivalent to a lifetime, debt judgment!
Prudent use of the credit card
Will regulations help? Probably not. Card users need a behavioral change to use credit cards wisely: a return to the old-fashioned way of saving and then buying. Prudent card use pays balances in full monthly; the wrong and expensive use carries monthly balances. Perhaps a first step to stop using consumer credit could be a prepaid credit card. Banks offer them loaded With funds, they are essentially cash cards, no credit checks are needed because the card must be backed by the cash equivalent of each purchase. If people want to take advantage of the 21-day minimum credit (in Canada), the next step is to turn the credit card into a check. Here is one 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, the full monthly balance of the card
- Monthly, top up your bank account with the amount the bank withdraws to pay 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, 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-90s. Today in Canada, if requested, most banks will accept this procedure, but they are unlikely to offer it.
Beware; Unless you distinguish the two parts of every spending decision (establishing the need and then deciding how to pay for the item), seductive merchant financing offers will trap you. Plus, unless he works with a budget or spending plan, he’ll spend more than if he used cash—estimates vary up to 30% more! If you don’t plan purchases and don’t pay your monthly balance in full, you can’t pay off a credit card; use cash or a prepaid card. Do you know how much interest you paid on credit card debt last year? This year to date?
Copyright (C) 2010, Michel A. Bell, Ontario, Canada.
