I recently answered credit card questions for a couple of young people. This reminded me that nothing is obvious until someone explains it to you. Financially savvy readers can take these questions as a reminder to start with the basics whenever helping people with their finances.
Here is my recollection of the questions and my answers.
Q: If I’ve built up a balance on my credit card over time, how much am I allowed to pay each month above the minimum payment?
A: You can pay off your entire balance any time you want. In fact, this is a very good idea if you have the money available. While you have a balance owing, the credit card company charges you interest on each item from the moment you make the purchase. Once you break this cycle and pay off your entire bill on time each month, you stop paying any interest, even though there is a delay from purchase until your monthly payment is due. It can take a few months of paying off your bill in full to get off the interest treadmill, though. I’ve even had to stop using a credit card for a couple of months to break the interest cycle.
Q: If I cancel my credit card, can I apply for a better card right away?
A: You’re allowed to have multiple credit cards at once. So, you can apply for the better card right away and cancel the old card when it is convenient. Once you have the new card you can use it for new purchases while you break the interest cycle on the old card.
A possible barrier to having multiple credit cards is if the available balances are too high. A new credit card issuer may not want to give you another card if you already have a huge credit limit available on your existing cards. I get bothered to increase my credit card limits frequently, but I hold the limits to about triple the most I’ve spent in a month.
Q: Can we change the subject?
A: Soon. Too many people get off on the wrong foot with credit cards. They think of their credit limit as available money to spend. The goal should be to pay off your entire balance owing every month and never pay interest.
How about those Raptors?