Understanding How Your Credit Card Works Can Save You Big

Life is… well… life. For a variety of reasons, maybe poor choices, maybe calculated choices, maybe life just happened, we wind up buried in credit card debt.

The average Canadian now owes over $22,000 in consumer debt. The average credit card balance is around $4,100. Sound familiar?

I know it was my situation. Well… mine was worse. Way worse. At my worst I had nearly $18,000 in credit card debt alone. Still working on it… recovery takes time. A lot of work and patience. But it’s doable. And understanding a few tricks can really help.

This is going to sound a bit weird, but when you’re deep in credit card debt, having trouble paying it off, using your card more can actually help.

Ok, so the first step is the same step everyone will tell you; get serious about managing your expenses. Reduce them as much as you can. But you’ve probably already done that and still can’t seem to make progress.

So… let’s work to reduce expenses even more… and one way we can do that is by using our credit card even more.

But there’s a caveat to that. You have to have cash to back up your purchases. Don’t overspend.

What we’re talking about here is a shift… a shift to what credit cards are really meant to be; a payment method. NOT free cash.

If we spend only what we have, we won’t get in trouble. But if we spend it using our credit card instead of our debit card, we can start making some serious progress on digging out of the hole.

Ok so for the past little while all you’ve been able to make is the minimum payment. That covers the interest and a wee bit of your outstanding balance. A couple of dollars at best.

It will take years, and thousands of dollars in interest to get it paid off this way.

So… let’s get that interest amount reduced. That is actually something we can control, without talking to our credit card company.

Many people misunderstand how interest on their credit card works.

You aren’t charged interest on your current month purchases. Only on whatever balance you have carried over from the previous month.

So we can leverage that to our advantage.

Start paying for everything you possibly can with your credit card. Groceries. Bus fare. Gas. Phone bill. Cable bill. That cup of coffee. Everything you would normally buy.

But only things you would otherwise buy. Don’t go over budget. This isn’t an excuse to go on a spending spree. You need to have the funds available to back it up.

My card is always sitting maxed out. So this is easy for me. I dump money on at the beginning of each week. That’s the money I have available to spend that week.

With a credit card, the payment you make goes against the oldest charges you’ve made.

So now, all my week’s purchases are “current charges”.

Personally I’m able to run about $2,500 in charges through my card every month. That’s $2,500 worth of my credit card balance that I’m NOT going to be billed interest on. At an average interest rate of around 20%, that’s about $41 a month in interest I’m not being billed.

My card balance is still the same. I’m still battling the debt and trying to get it knocked down. But by using my maxed out card more, I’m actually able to save money. About $41/month. That’s almost $500 a year. That’s money that can be put towards debt reduction that took no effort on my part except a habit change.

Get Rewarded

Most credit cards have some sort of built in benefits or rewards. We’re grasping at straws, so we may as well bank every advantage we can possibly get. Running my $2,500 worth of standard monthly expenses through my credit card gained me $200 worth of iTunes gift cards in the past year.

That truly is free money. Why wouldn’t I take advantage of that? Even while slashing expenses and closely monitoring everything while trying to pull myself out of debt, I can still enjoy music and the odd movie.

Supercharge Your Saving

Now that we’re making the bulk of our daily transactions on our credit cards, which have no limits on the number of transactions we can make… there’s more ways to save…

They tell you… when you’re in debt trouble, use your debit card, spend money you have. Not money you don’t.

This is a great platitude. But it’s designed to work against you. Not for you. It’s designed to make Interac and the banks money. Your money.

Spend money you have, not money you don’t, is right. But don’t spend it with a payment method that’s costing you money…

Every debit card transaction you make costs you money.

Every credit card transaction you make costs the vendor money.

The vendor makes up for this by building that cost into their price. So you’re actually paying for the credit card transaction anyway. But you’re not getting the benefits that come with it (reward points, purchase insurance, etc).

In addition, you’re paying the bank for the debit transaction.

“Oh but I have unlimited debit transactions. They don’t cost me anything.”

Except they do. You’re paying a lot of service fees for that plan that gets you unlimited transactions. You don’t need to be.

If instead, you run as many charges as you can through your credit card, then you’re only making a couple of transactions a month on your bank account as you pay the credit card charges off.

This results in your bank account transaction count being significantly lower. Which means, now you can downgrade your service plan, costing you less, further saving you money.

There will still be a few transactions you need to do through your bank. Ones you can’t do with a credit card. Like rent or mortgage payments. Utilities. Car payment. Insurance. Etc. So be careful to count those before you reduce your plan. But if you can keep it to only regular recurring charges only going through your bank account, you should be able to save significantly on bank fees.

At TD for example, their Unlimited chequing account costs $15.95/mth. Their Everyday Chequing Account is $10.95/mth giving you 25 transactions. Downgrading gives you another $60/year in your pocket. If you can get creative and limit yourself to 12 transactions a month (which is far easier than you might think), their minimum chequing account would only run you $3.95/mth. That’s $144/year back in your control.

Now, if you stick to budget and apply that savings to your credit card debt every month, by the end of the year you’ll have had a net impact on your finances of about $158. (Yeah… you’ll be saving even more interest too)

It All Adds Up…

But when you’re buried in debt, every little bit helps. And when we start factoring in interest savings, it adds up fast.

So taking the $41/mth I was saving in credit card interest simply by using my credit card as payment method for more transactions that I would be doing anyway, plus the $12/mth I was able to save by downgrading my bank account service plan as a result, taking into account the impact of compounding interest, I was able to reduce my credit card debt load by almost $700 in one year.

Plus, don’t forget that wack of reward points we earn. My $200 worth of iTunes gift cards.

No change to lifestyle. No change to monthly spending. Simply changing how we pay for things.

Now it will take time to get it down to $0 this way. Obviously other life changes need to be made as well. Recovery is a process.

But it’s one step that can be taken that is actually really easy to do, and adds up quick.

Credit cards can sink you fast.

You can’t afford to be leaving money on the table.

So manage them by using them.

Added Bonus…

Because you’re making regular payments to your credit card, doesn’t matter that your balance is still high, you keep the card company off your back.

And because they’re fairly large payments, it actually works towards helping improve your relationship with them.

Extra trick: try to make your payment just before your statement closing date, and don’t rack up too many charges too quickly. This will lower the official “balance owing” which is the number that gets reported to the credit bureaus. Doing this religiously may actually help improve your credit score a little bit over time.

Bare minimum the strategy keeps you from having late or missed payments you didn’t have the money to cover.