Thursday, May 12, 2016

Credit Card Q&A

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?


  1. "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."

    If you have the money available, a very good idea is to not use a credit card in the first place.

    1. @SST: I considered saying that it's better not to build up credit card debt in the first place, but I think they knew that, and that finger-wagging would have turned them off.

  2. The following anonymous comment either got lost or delayed getting posted:

    "If you have the money available and you pay your CC bill on time, it would be foolish not to use CC. Last night I was checking how much $$ I received as a free grocery by using PC MasterCard. It was $240 worth of grocery for the last 12 months. I could use cash or debit card to pay those bills but I wouldn't get free grocery. And I don't shop for reward or cash back. I shop while 95% stuff are on sale."

    If we factor other considerations into the analysis, the picture is less clear. Someone worried about their ability to keep from overspending might avoid credit cards even given the loyalty benefits. Another consideration is the macro effects of credit cards. We all pay higher prices to cover the cut that goes to credit card companies and the associated banks. It doesn't pay an individual to avoid credit cards for this reason, but we'd all be better off if we could reduce the fees that credit cards companies extract from retailers.

  3. "Another consideration is the macro effects of credit cards."

    Thanks for mentioning this, MJ. It's the rare CC uses who thinks past the "free" hook. The macro ramifications -- both financial and societal -- of credit cards is massive, but the hurdle of altering human behaviour in order to reduce the negative impacts is perhaps even more daunting.

  4. Sometimes it's useful to think about the fundamental basics of a subject we haven't considered in a long time, and I like your responses. I'm sure a lot of people don't realize they pay interest from the date of a purchase if they are carrying a balance on their card. We get complacent when granted a grace period on purchases while not carrying a balance.

    I recall this subject appearing on your blog before and I mentioned that when I get dinged for interest from an oversight (missing a payment), I'll usually ask for leniency from the bank. After looking at my payment history, they'll usually give me a refund. I then overpay my balance to make sure I don't end up paying any more interest until the grace period gets reinstated.

    In the future, I'm less likely to ask for lenience. I'll just take responsibility and pay up. Most of my payments are automated now, and I make sure everything is in order once a month.

    1. @Gene: The last time I forgot to pay on time I only had one credit card. But now I have two, so if I ever forget to pay again, I'll just stop using that card until they stop charging me interest. If they want to keep charging me a few more pennies to extend the time where I have no grace period, then I'll just wait.