Beware of Credit Card Traps when Financing Purchases
December 11, 2017
This is important for just about everyone as we all buy things. Some countries, as I understand it, do not have the same concept of credit cards that Americans do, so I will be writing this from an American perspective. I worked in the credit industry for quite some time and have extensive experience in these matters.
Obviously when you buy something you have to pay for it. If you have the money you can pay for it then and there, or if you don’t you can choose to finance it. Some things are normal to finance. Things such as student loans, cars, and a home are things that just about every person will finance. There are also things that are being financed much more in these times than in the past such as vacations, trendy clothes, video game systems and the like. There is argument that the “we want it now, but pay later culture has another financial shock coming the economy’s way in the credit card meltdown” I have been a credit analyst that approved loans and credit cards and collected them in my career. I do think there is going to be problems with the credit card system one day and greater than the problems we are already seeing.
There are different ways that items can be financed. One of the best ways is 0% interest financing. Here you borrow money and don’t pay any interest. Companies usually do this when they are trying to drum up business. They also have no interest and no payments for a year or longer. This is the banker’s way to make money. How? Easy. Most people will put off and put off paying the payment while it is interest free. By doing this at the end of it you get hit with all that interest. Most companies also compound the interest. All credit cards compound interest.
Compounding interest basically means that the interest you owe
Is calculated at the end of the day with a daily periodic rate (see your credit card statement. It will be really small like less than .01% in some cases. When you borrow money you do not want it to compound, but in savings you do want it to compound. To put it simply you are charged interest on top of interest every single day.
You also can just use a credit card. I realize it has to be done, but can be a bad idea. I personally have several credit cards, but owe a balance on none. This is because I learned the value of “want versus need”. I always ask do I want something or need it. If you want it I make sure I am getting the best price and quality and deal. If I need it I check out the same but you need what you need. If you car needs repairs you cant really skimp on that, but if I need a new video game I can wait until the price goes down or buy one used.
Now when people run a business there will almost always be financing. Not many people can buy everything they need all the time. This is especially true of raw materials or goods to resell. If you sell toys on eBay on a very big scale it is very possible that you may have to run a balance on a card to get your inventory. When you sell it you then pay the card off, hopefully at least. The main thing is to not get caught in a bad situation. It is very easy to do. Always look around if you have good credit someone is always offering a deal in order to get your business.
A final tip deals with automobile financing. Get your own. The car finance manager almost always will charge you more than you can get if you get it prior to the purchase. The reason is they make money off that. Typically you will pay at least .5% higher with good credit than what you would find on your own. If you have “challenged credit” it can be up to 5%. This can add up to several hundred to several thousand dollars over the long runs. In all fairness the dealerships do this because that is how they make money there. Not all do this and often times if you are financing through the companies own finance (BMW finance, Toyota ect ect ect) then you may not pay any spread (the difference between what you can get and what they charge you). Hope these tips help.
There are exceptions of course to this. Not everyone will listen also. I am sure there are grandparents who would not deny a present even if they could not afford it, but that is a choice people make. Sometimes you may finance a wedding. To each their own. When I got married I told the boss (wife) that with the marriage failure rate I was not going in debt for it. We had a great time and I took it all out of savings. I have spoken to people who have had to file bankruptcy after paying thirty thousand dollars for a daughters wedding. I believe in “judge not less ye be judged” but the people I was speaking to had a house and car what was not worth that much adding the value of both together. There is such a thing as living above your means. The bad thing is that they got divorced about a year prior to speaking with me about a mortgage trying to fix the mess they were in.