Why I don’t care about the interest rate on my credit card.

For me, credit card interest rate is a non-issue. I use my card as a convenience and for the cash-back feature. I never use it as a means of living on borrowed money.

The paradox of credit cards…

Credit Card Paradox

Why you can’t win when you pay interest on a credit card…

As long as there’s a balance on your credit card, you are in debt. The lender requires you to pay interest for the use of that money. Credit card companies are happiest when you pay the bare minimum, because that extends the time you are making payments. The longer the time you are paying, the more interest they get from you. The table below illustrates the effect of time using two different credit card balances. In each case, we see that the higher the monthly payment, the shorter the time to repay the loan. Continue reading

Are we financially literate?

November. Financial literacy month in Canada. The time when we are officially reminded of information and strategies we can use to improve our financial health.

Financial literacy refers to the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources. It’s a term that was introduced fairly recently, when governments began to focus on the need for consumer education in this area.

A recent newsletter from the Financial Consumer Agency of Canada reports that Canada is near the top of the charts for financial literacy in a global survey published in spring 2017 by the Organisation for Economic Co-operation and Development (OECD).

Canada tied for second worldwide…in the financial literacy component of the Programme for International Student Assessment, a global survey of 15-year-olds.

This report was followed by… [one] on adult financial literacy… [in which] Canadian adults…tied for second with Norway.

As a Canadian, I was feeling proud… and perhaps even a bit smug. Then I remembered a Statistics Canada report, also from last spring, telling us that the debt-to-income ratio of Canadians was at an all-time high of 167%. This means we owed $1.67 for every $1 of disposable income. The fact that Canadians have a lot more debt than income seems at odds with the assertion that we have high levels of financial literacy. How can this be? Continue reading

Holiday. Fun?

With the arrival of December, many people experience angst over the approaching holiday. For some, this has to do with awkward, difficult and/or impossible family relationships, which come into focus under the cultural expectation of family togetherness at this time of year.

However, consumer debt is a more pervasive source of December dread. Yesterday’s news reported on Bank of Canada concerns about increasing levels of consumer debt. The Globe & Mail referred to “insatiable borrowing,” quoting a senior director of Equifax, a major credit reporting agency: “Following a frenzied start to the festive shopping season with more to come in the countdown to Christmas, we can expect the consumer debt to rise even further. Tis the season, so we can anticipate credit cards getting a strong workout throughout December.”

Living in a consumer culture puts us under enormous pressure to spend mindlessly. And our ready access to credit cards has been the marketers’ dream, fuelling the attitude they want us to have: What the heck, spend beyond your current capacity because you can.

Naturally, they love it when we pay their 20% interest for years and years. However, the financial consequences are far beyond what most people imagine. The system is complicated and complex, and there is much we don’t know. Early in my teaching career, I discovered that students generally thought that if they made the minimum payment on a credit card, they weren’t in debt. By using their cards and paying the required minimum, they thought they were doing the smart and adult thing. However, that is an illusion. It takes a shocking length of time to pay off debt Continue reading