I was at a department store today and while I was waiting in line to pay for my purchase a poor couple were persuaded into signing up for the store’s charge card in exchange for an extra 10% off their purchases that day. The really sad part is that they were buying a few pairs of socks – maybe the total value was about $20 – so 10% off of that means $2 in savings.
The woman was initially very adamant that they not sign up for the card, but the husband was persuaded by the dangling carrot of the extra 10% off – his rationale was that they could pay it off before any interest accrued and then cancel the card. I think many people make the same rationalization. And while some may actually pay for the purchase and then cancel the card – probably an equal amount of people do not end up paying off the balance, end up paying 28.8% in interest on the balance and maybe even more will start increasing the balance on the card.
So what started as an attempt to save 10% on your small purchase ended up turning into yet another source of expensive credit that only serves to put you one step closer to higher spiralling credit problems. So I suppose my message is this: almost everyone signs up with the same intention – to pay off the balance immediately and then cancel the card, but there is a percentage of those who instead fall prey to the vicious cycle of overextending their available credit – all for the dangling carrot of a few bucks saved today.
Ask yourself if the few dollars you could save today is worth exposing yourself to the possibility of falling into that trap! It may end up costing you thousands!
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There is also the added disadvantage of the impact on your credit score. Everyone should know their credit rating and how activities affect it: such as shopping for purchases on credit (buy now, pay in 18 years!) or signing up for yet another credit card. Read this http://www.fcac-acfc.gc.ca/eng/publications/CreditReportScore/PDF/CreditReportScore_e.pdf
Poorly managed credit can add 2-4% to your mortgage rate. Missed or late credit card payments, having many cards, opening & closing credit accounts–all can have a negative effect on your credit rating. Don’t take invitations to sign up for credit either in the mail or at the cash register lightly. Educate yourself and use credit wisely.
Well put Leslie – that link is great that you provided – I think everyone should check it out.