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February 2015

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Credit Cards: 5 Ways How To Keep Your Money.

Written by , Posted in Business, CSR, Sustainability

The credit cards in your wallet may be costing you more than you think.

 Credit Cards: 5 Ways How To Keep Your Money.

 

You see it. You want it. You pull out your wallet and slap the cash down on the table. In moments you’ll have the coolest gadget ever. You’ll have endorphins coursing through your body giving you that special high that only retail therapy can produce, that wonderful feeling you get when you can buy something you’ve been waiting for. But what happens when you don’t have the cash?

There was a time that the concept would only be answered with, “Wait and buy it when you could afford it.” In a way it was a test. If you really wanted it, you’d save your money until you could get it. If you still wanted it in a few weeks then you’d buy it with your hard earned money, but if you realized it wasn’t as shiny the second time you saw, you’d leave it for someone who wants it more.

For a time, the general store might offer in-store credit to various people in town, but in the city where no one knows your name, then no one’s going to let you pay later.

That is of course until 1949, Frank McNamara invented the Diners Club Card. With the revolving account came an entirely new prospect. Take today, pay tomorrow. The retailer will even give you no pay deals. Imagine, you can have the desk or chair without paying for months, even years. Credit Cards

Of course that’s a dangerous prospect if you forget to pay.

Today, we have a myriad of different credit cards; Visa, Mastercard, Amex, Discover. There franchise accounts like the Bay and the Brick. There are so many credit cards available that these companies had to start offering value-added cards. There are points cards and cash back cards, no pay cards and interest only cards. Never forget, everyone of them is designed to help you spend your money before you earn it. In fact, once you’re on the credit card treadmill, the only way to keep them current is to continue to use them. Spend today, pay yesterday’s tomorrow. That way, you are constantly keeping it current. Why? Because you’ll destroy your credit unless you keep feeding that ugly beast if it has a balance.

When I was at the bank we had a few options for people. Essentially, the credit cards would give you between 1 and 4 percent back in some form of reward. But have you ever wonder how Visa and Mastercard earn their money? It’s kind of like a casino. More money has to come into the system than go out of it. They earn when you don’t pay.

Let’s do the quick math. Assuming your credit card is a 19 percent card with 1 percent reward. You spend 100 dollars on December 1st. You get the equivalent of 1 dollar in your reward. Now you will have between 21 and 26 days of interest free before the payment is due. You’ll notice it isn’t the same period as the monthly bill. Once you hit the first day of interest bearing period you will be invoiced interest on the full invoice amount for the whole month. So on day 22 or 28, you will be hit with interest of 1.60. Yes, that’s right. Go over by one day and you’ll pay almost twice as much as your points are worth. Every month thereafter will be the same. On $100 you’ll pay $19 in a year. And as high as 29 on some credit cards. And this isn’t even touching the annual fee for that card of as much as $200.

As a business owner there is a tendency to think the same. Buy today and get the points, points you use as personal gratuity without claiming as income because they are points and not real dollars. Then when you sell what you’ve purchased you get to pay it off. It’s a perfect system.

Once a company is on the credit card treadmill your payments today only resets the payments from last week. You can’t divert that money anywhere because the second you do, you miss a payment at worst, or only pay the interest at best. Then three months after you’ve sold your item you still owe for it, having only paid the monthly interest. It won’t take long until your house of cards comes tumbling down.

So what’s the solution? First of all, when you’re just starting out:

  1. Don’t get any credit cards.

The new debit cards will allow you to purchase goods online. You can even get points debit cards. Scotiabank offers cash back and movie scene points debit cards.

  1. Don’t get a points card

If you find yourself needing a bit of credit, Don’t get a points card. Your income likely won’t be high enough to cover the higher interest. Get a low rate card or split the limit between a points card and a line of credit so you can transfer the balance to the line. Understand the cost of interest and annual fees.

  1. Have only one credit card

If it’s too late and you’re already on the credit card treadmill then only have one card. Trying to juggle card payments can destroy you.

  1. Pay more than you have to

It’s true that sometimes you need inventory to sell and it takes time to sell that inventory. If you’ve purchased on a no pay or interest only plan then make sure you pay more than you have to. By increasing the payment to more than the minimum for your credit cards you won’t have to pay as much later.

  1. Can’t afford it? Don’t buy it

This is likely the best option you can explore. Our grandparents did it. You can too. Take some time to think about what you’re buying before taking possession. You’d be surprised to realize what you can actually live without.

Credit cards are like guns. They can be a very strong tool in your toolbox, but if they aren’t used properly then someone can get hurt and you could lose everything. When it comes to your business’ sustainability, credit cards can be a great tool, making it easy to purchase items online or over the telephone, but they can also be your downfall. There is a graveyard filled with business start-ups that had to have everything and failed because of credit cards. I don’t know about you, but I’d rather you succeeded than your credit card company.

Trust me, it pays to read the fine print.