With the average Canadian debt level at 162% of disposable income, debt might be the most important thing to talk about. We have developed and fostered a culture of "now", and with the availability and ease of use of credit “now” has become more and more pervasive and it comes at a cost. So what is the cost of "now"? That depends and this might be a good place to start the conversation. What does credit cost? In the olden days, if you wanted to buy something you simply had to save up until you had enough money to buy it. Now, you can just swipe a card and be off enjoying your new purchase; but just how much that purchase will cost you depends on what interest rate you pay and on how long it takes you to pay that balance off.
The average credit card balance sits at around
$3,600.00 and the typical interest rate is around 20%; so this $3,600.00 balance will cost $720.00 per year in interest, or to put it another way; for every month that this balance remains on your credit card, $60.00 gets added to your debt load. So a $3,600.00 purchase will end up costing $4,320.00 in one year. Credit can be a great asset, when used responsibly, but it can also get out of hand pretty quickly too. By the time you get your monthly statement you have had 30 days to rack up the balance. Paying only the minimum balance can get you by for now, but it can also perpetuate a debt that can easily grow to the point where you can ONLY handle the minimum balance.
Before you make that purchase on a credit card, be sure you know how you are going to pay for it. There is a grace period of 21 days from your statement date to when your payment is due, but there is also a billing period of 30-31 days. If you were to make a purchase on the day your credit card begins its billing cycle, you could have as much as 52 days until that purchase is to be paid for. Look at it this way, that’s 52 days to save the money needed to cover the cost. In this way, you can take advantage of the credit card to increase the amount of time you have to save enough money to pay for your purchases, if you don’t have enough to pay for it outright to begin with.
Even with enough money to cover the purchase, a savvy saver could invest that money in something like a high interest savings account and earn interest for at least 21 days (being the grace period); but this can become very complicated to manage so let’s just stick with the basics for now.
Either way it is important to know the terms of your credit card. Know what your interest rate is how long your grace period is and the period of your billing cycle. Make sure you have a plan to cover your credit card balance when it comes due. This way, you can build a strong credit history, which will come in very handy later on in life when your kids need to get a loan for a car, for school or even buying a house. Good credit, handled responsibly can open opportunities that otherwise may not be available.