Thinking Errors When it Comes to Credit Card Debt – G.S.Thandi

Ever since the global economic crisis, banks are becoming much more restrictive with their lending policies. If you can’t manage your finances, don’t expect the bank to give you much help.

Recently, the Bank of Canada issued its economic assessment report and warned Canadians about the amount of debt they carry. Many Canadians have taken advantage of very low interest rates, and as a result, their household debt has risen. While the world continues to recover slowly from a recession, the Bank of Canada expressed concern that these continued unstable economic times, coupled with heavy debt loads, could put some people at financial risk. The amount of credit card debt carried by consumers was also singled out as a concern.

Economic times have changed drastically in the past few years – isn’t it time our credit card use changed too? People have several thinking errors – mistakes in our thinking that help us justify often poor decision – when it comes to credit card debt.

Thinking error # 1: All I have to do is make my minimum monthly payment
Every thinking error has truth in it – that’s what makes it so easy to justify the error. Yes, technically all you have to do is make your monthly payment, but let’s take a closer look at such a plan.

If you have a credit card balance of $5000, a credit card interest rate of 18%, and a minimum payment of a seemingly manageable $200, and every month you pay that minimum amount it will take you 11 years to pay off the full $5000. When all is said and done, you paid nearly $3000 in interest!

Thinking error # 2: The interest rate offered by that card in the advertisement is great.
Generally the rate offered when you first sign up is an initial one. Very soon, it will increase, sometimes to double or more of what it initially was. If you only plan on making monthly payments, the amount you are going to pay on interest will increase dramatically.

Thinking error # 3: I can enjoy the purchase now and worry about the payment later
Again, there is truth in that. However, will you be able to make that payment in a month from now? If not, whatever ‘great deal’ you got with that purchase isn’t such a great deal when you calculate the credit card interest on top of it.

Thinking error # 4: I’ll keep it in my wallet / purse but just use it for emergencies
Some people can do this – are you one of them? If it’s too great of a temptation (that anytime you are in a store, you have the urge to pull it out and use it) then you are definitely not someone who can just keep credit cards around for emergencies.

Thinking error # 5: It pays to have a credit card – I get cash back, air rewards, etc.
This only makes sense if you pay off the full balance on your card each month. If not, whatever rewards you receive need to be compared to how much interest you end up paying. Calculate the benefits of having the card versus the cost of the reward if you just paid for it with cash: remember to calculate the interest you are paying, plus the annual fee on the card (if there is one). After you do all the calculations, how much is that ‘free’ trip to California costing you?

Thinking error # 6: I can always borrow from the bank if my debt load gets too high
Ever since the global economic crisis, banks are becoming much more restrictive with their lending policies. If you can’t manage your finances, don’t expect the bank to give you much help. Even if you do receive a loan from the bank, if you don’t change your spending patterns you’ll find yourself right back in trouble.

Thinking error # 7: I can just work more to pay off my debt faster
Few businesses were left unscathed by the recession, and many are still facing its effects. Chances are that overtime, if it was ever offered at all at your place of employment, has been cut down significantly. No longer can most people spend more during certain times of the year, with the expectation that they can just work extra and pay it off.

Always try to pay the full balance each month on your credit card. If you can’t, and tend to have any of the above thinking errors, maybe it’s time to reconsider your spending habits!