Episode #24: The Online Banking Button You NEVER Want To Use

 
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Okay okay, all theatrics aside there legitimately is one button in your online banking that you NEVER want to use, and that’s the ‘pay minimum balance’ button you see when you go to pay your credit card. Now, if you’re sitting there and scratching your head, saying ‘whaaat is she talking about, why is that button dangerous’, or maybe even ‘man I love that button’ then you’re definitely going to want to stick around for today’s episode. If you prefer to watch these lessons in TV format make sure you check out The How To Adult Show on Youtube!

What is the ‘Pay Minimum Balance’ Button on your credit card?

If you have a credit card, and if you’ve ever paid that credit card off through your online banking (which hopefully, you have) then you’ll know that when you pay off your card in your online banking window you have three payment options.  These options are

  1. Pay Last Statement Balance: which means you’re paying your last statement in full.

  2. Other amount: which means you get to choose how much you pay,.

  3. Minimum Payment: which is a really tiny amount the credit card company offers for you to pay, instead of paying the full balance at once.

For example, if you have a $2,000.00 credit card bill, you might see a minimum payment option of just $10.00 for that month, instead of paying the full amount of $2,000.00 that you actually have owing on your most recent statement.

Should you ever use the minimum balance payment option?

Unless you’re up the proverbial creek without a paddle and absolutely cannot pay your credit card bill in full, you should NEVER use the minimum balance payment option.  Let me say that again, you should NEVER allow yourself to use the ‘minimum payment’ option on your credit card.  Realistically, you shouldn’t use the ‘other amount’ option either, so really, the only button you should ever be selecting, ever, is the ‘pay last statement balance’ option. I know it’s tempting to only pay your minimum, especially when you’re staring a big credit card bill in the face.  I know that in the moment is seems so nice of the credit card company to offer for you to pay just a little bit of what you owe, and I know you can promise yourself that you’ll save more next month and pay the whole thing off at once later, but none of this is true.  Chances of you saving more next month are slim let’s be honest, and it’s absolutely NOT the credit card company being nice by offering for you to pay less and carry your balance forward.  

Before you freak out, if you’ve been doing this, don’t feel bad about it.  Chances are no one ever sat you down and taught you how a credit card works.  Actually, you’ve probably had the opposite experience, you probably just received a ‘pre approved’ credit card in the mail one day, maybe when you were even a teenager still living at home, and you didn’t read the fine print.  Even if you are the kind of unicorn person who does read fine print, it probably wasn’t even entirely comprehensible.  So, again if you’ve been using the minimum balance button, don’t feel bad about it, no one is born understanding how a credit card works, but now is the time to commit to not using that button anymore, and making the change to paying your balance in full every month.

How does your credit card even work?

So, first thing is we need to understand how credit cards work, and the FIRST thing you need to understand is that your credit card is a business, and the goal of that business is to make money.  And credit card companies make money in two ways.  First, they charge a small fee to the vendor you make a purchase from, and second your credit card will charge you interest if you make late or partial payments. Which is something that a lot of people do, and credit card companies make a lot of money off of it.   

When you use your credit card you’re borrowing money from the credit card company, and then it’s up to you to make sure you pay all that money back to them on time.  When you miss a payment, make a late payment, or only pay part of your balance and carry the rest of it forward, the credit card will charge you interest on that, and credit card interest rates are really really high.  Like these are the most behemoth massive interest rates you will ever encounter.  In Canada, most credit card interest rates range from 20% up to as much as 30%, which is crazy high.  

And this is how credit card companies make money.  You borrow money from them, they oh so nicely give you the option to only pay part of that back by the due date, and then they charge you huge amounts of interest for the privilege of borrowing that money from them for longer.  And this is why they give you the ‘minimum payment’ option.  It’s much more beneficial for THEM if you use this option, and it can potentially be very harmful for your finances.

What happens when you don’t pay your credit card in full?

So, what happens when you pay the minimum amount.  Let’s say you owe $1,000.00 on your credit card.  If you choose to pay the minimum payment, chances are you’ll have the option to pay something like $10.00.  This means you pay $10.00 of the bill you owe, but there’s still $990.00 dollars that you borrowed from the credit card company, that you still owe them.  This $990.00 is now carried forward to the next month, and as soon as the original statement due date passes, you start paying somewhere between 20-30% interest on that $990.00.  Carrying this debt forward at this high of an interest rate is going to cost you a lot of money.

So what happens, and this is where people get themselves into trouble and create huge consumer debt, is you carry forward that $990.00 to the next month and you’re paying interest on that amount.  Then, you spend another $1,000.00 that month, so now you owe $1,990.00 in money that you’ve borrowed directly, plus the interest you’ve been paying from the previous month.  If you do this again (because they will offer you the minimum payment option again) you’re now carrying over an even larger amount of debt AND you’re paying huge interest rates on that higher debt, as well as starting to pay interest on the interest that you’ve already accumulated. 

This is how people rack up HUGE credit card bills without realizing it, and more importantly this is why it’s so hard to get out of consumer credit card debt. You don’t just have to pay back the money that you’ve spent, you also have to pay all the interest that’s accumulated over the period of time when you’ve been avoiding paying off your credit card in full.

So how do you avoid credit card debt? Follow these 4 rules.

The good news?  It’s really easy to avoid falling into this trap of creating a growing monster of consumer debt for yourself.  All you have to do is pay off your credit card balance, in full, at the end of every month or whenever your statement is due.  Now I know, if this is something you struggle with, you’re probably sitting there going, ‘chya, that’s easier said than done’, SO here are a few quick and easy to implement tips that will help keep you on the straight and narrow of using your credit card responsibly.

Credit Card Tip #1: Never spend more on your credit card than you have in your bank account.

First, never spend more on your credit card than you have available in liquid cash in your bank account to pay it off.  Know how much you have in your spending account, know how much you’re spending on your credit card, and never spend more on the card than exists in your bank account.  Following this one simple rule will keep you out of a lot of financial trouble for the entire rest of your life. 

This means you don’t ever use your credit card to ‘finance’ any large purchases that you plan to pay off over time, like a trip, or furniture for your new condo.  Your credit card should not be used to finance your life. 

Credit Card Tip #2: Don’t use your credit card as an emergency fund.

Never use your credit card as an emergency fund.  You should never have a large and unexpected expense that you have to put on your credit card.  This is what an emergency fund is for, and if you don’t have one yet I need you to go tune in to episode 6How To Start Saving An Emergency Fund’ and episode 16 10 Tips To Save Your Emergency Fund More Quickly to learn about how to create one for yourself. 

Credit Card Tip #3: Create a system that will help you remember to pay your credit card balance off by the due date. 

Don’t ever let yourself ‘miss’ a credit card payment because you’re too lazy to check the statement, or you just ‘forget’.  Speaking from experience here, it’s really annoying the pay that sucker off again if you accidentally miss a payment, because of the way the interest compounds!  So, use your calendar and set a date for yourself, that lines up with when your credit card statements come available and when they’re due, and put it in your calendar that this is your date to pay off your credit card.  Ideally this should line up with when you check over all your finances for the month, but even if you just start by making sure your credit card is fully paid off, then you’re doing well, that’s a good start.  

Credit Card Tip #4: is never, ever, use the cash advance allowance on your credit card.

Using the cash advance option will often charge you an even higher interest rate AND there’s often a service fee that you’ll get charged.  Even worse, the grace period you have to pay back your credit card often doesn’t apply to cash advances, meaning you’ll likely start paying interest on that money much sooner, if not right away.  So essentially, there’s almost no scenario in which you should be using the cash advance option on your credit card.

Linked Resources

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Episode #25: How My Emergency Fund Saved My Bacon During The Pandemic

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Episode #23: Why the financial advice you've been getting MIGHT be wrong (and where to find the RIGHT advice)