Do you know the movie “Other People’s Money” with Danny deVito, Gregory Peck and Penelope Ann Miller?
It’s a film about a corporate raider (deVito) that threatens to take over a “mom and pop” company. The patriarch of the company (Peck) hires his wife’s daughter (Miller), who is a lawyer, to try and protect the company.
It’s a funny movie but that’s not what I want to talk about but
Other People’s money in the context of credit cards
A credit card is a tool that can be used wisely or recklessly, it depends on your skills, knowledge and self-discipline. Knowing how many people are in credit card debt, one can assume that there is a huge lack of either skills, knowledge, self-discipline or a combination of the three.
Have you heard of the often cited study conducted by Dun & Bradstreet? The company found that people spend 12-18% more when using credit cards instead of cash. Also, impulse purchases are more likely with a credit card than with cash and people focus on benefits over costs when paying with a card a 2012 study by Promothesh Chatterjee and Randall L reveals.
You pay (mostly) with debit?
Well, that might not be the solution either, because an electronic debit isn’t seen as “real money” either according to a study by Amy Finkelstein’s E-Z Tax: Tax Salience and Tax Rates on highway tolls in the United states. She found, that states can get away with charging higher tolls if they offer debit as a payment method versus cash only.
But paying with cash is not always possible. Especially if you want to use online services and/or buy products online you will need to pay with a credit card or PayPal, cash is not going to help you in these scenarios.
Some people are completely against credit cards while others insist one can not live without one. I myself am somewhere in between, even though I have been burned once by using credit cards (more about that further down). I still used credit cards but I pay extra attention when using this kind of Other People’s Money. Here are my tips:
Keep a close eye on your spending
Keep track of your spendings in your smartphone or in a notebook. You could also log in to your account every few days or once per week. Also, make sure whatever you pay with your credit card, you have the amount ready in your bank account for when the statement arrives. As stated above, when we use Other People’s Money, a.k.a. a credit card, we tend to spend more and think less.
Double check each transaction on your statement
I know of people who don’t look at their statement, they have it on automatic payment through their bank. Because it is on automatic they don’t bother to look at the statement.
In my eyes this is very reckless. What if somebody stole your credit card information and made payments with it? I had this happen to me back in 2003. While I was on vacation (here in Canada) my card information got stolen and they charged my card with over $4,000 within only a few days.
Because they did not steal my card but only my card information, I was unaware of this until the statement arrived. Luckily I had all my receipts and 100% overview of my spendings, therefore I saw right away that something was wrong. I was able to dispute these charges and my credit card provider credited the amounts back to my account.
For business expenses, you will need all your receipts for tax purposes anyways, but if you don’t compare them with your statement each month you might miss the window to dispute wrongful transactions.
Don’t give the credit card provider (or anybody else) access to your bank account
As mentioned above a lot of people have their payments automated and give the credit card provider access to their bank account. While this seems to be an elegant way of handling your finances, I advise against it.
First because now you don’t need to remember to pay the bill and therefore, you will even less likely check your transactions on the Statement each month. Second, remember that incident I told you about above where over $4,000 of wrongful transactions were charged on my card?
Well, back then I had given the credit card provider access to my bank account. By the time I got the statement in the mail these $4,000 were already paid and not in my bank account anymore. While I did get the amounts credited back to my credit card account, the credit card provider refused to pay the money back to my bank account, where I actually would have needed it to pay other obligations!
It goes without saying that since then no credit card provider (or anybody else but me) has access to my bank account.
Pay off each balance in full
By using a credit card, you use the Other People’s Money, in this case the bank’s money, to buy a product or service.
The bank, of course, hopes that you don’t pay off the balance right away because that is how they make (more) money. But you should be smart and wise and pay off your credit card balance each and every month. Otherwise, you might quickly end up paying a hell of a lot more for that product or service.
Here in Canada, the credit card companies have to tell you what the effect is if you only pay the minimum payment due. For example, my November balance was $348.88, quite moderate balance, do you agree? The minimum required payment for that balance was $10.00 due within 21 days of the Statement date.
Here is the effect if I would only pay the minimum due: I quote:
If you only pay your Minimum Payment Due each month, the estimated time for repayment in full of your balance is 3 years and 8 months.
Can you believe it? 3 years and 8 months! 44 months of $10… you do the math.
It gets crazier with a bigger balance of course, in April my balance was $2,149.92 and the credit card company informed me on the statement, that if I pay only the minimum payment due each month (which was $21 in this case), the estimated time for repayment in full would be 18 years and 9 months.
We don’t really want to do the math here right?
Now I don’t know about you but I don’t want to pay off a purchase of roughly $2,000 over a period of almost 19 years. Besides, in less than two years I don’t even remember anymore what I bought for the $2,000 but I still will have to pay for 17+ more years (if I stay stupid enough to only pay the minimum payment due that is of course).
Unfortunately, most people don’t even realize these facts, they never do the math what it will cost them by not paying off the balance in full. Here in Canada the credit card company has to do the math for us, but guess what: most people don’t read that information on their statement, most people don’t read their statement at all.
Now over to you, tell me in the comments below, do you use a credit card and if yes,
- are you keeping a close eye on your spending?
- do you double check each transaction on the statement?
- did you give your credit card provider access to your bank account?
- do you pay your balance in full or do you only pay the minimum amount required?
PS: A little sidenote:
My credit card company charges me 12.99% annual interest, which is quite low for here in Canada where most credit cards come with a 19.99% annual interest and Retail cards up to 28.8%*.
Interest rates like this are unheard in Switzerland, where I come from. Since 2002 there is a consumer credit law in effect that restricts the annual interest rate to a maximum of 15% anything above that is considered extortion and there is serious discussion to even reduce it from 15% to 10%.