This is one of the videos ĠEMMA produced with the Central Bank of Malta in our money matters and the family.
Let me introduce the ĠEMMA family. I am Tony. I am Maria’s husband. I work as a manager in a large business in the services industry. My wife, Maria, is 40 years old and works in her father’s family business. We have two kids: Matthias, our son who is 11 years old and is now in secondary school, and Angele, our daughter, who is 17 years old and is finishing upper secondary school this scholastic year.
With Xmas and New Years eve round the corner, I sat Angele down and explained to her some critical money management tips. The first important point that I underlined to Angele is that she should spend responsibly – enjoy herself but within her means. Thus, once she set her budget to buy whatever, she decided to use her debit and not her credit card.
Why, you may ask? When you use your debit card to purchase, you are withdrawing money directly from your savings account. In other words, you are paying now and not incurring any form of debt, and hence no interest on the money you withdraw.
On the other hand, you are entering into a ‘loan’ with your credit card provider by using your credit card. When you purchase with your credit card, at the end of the month, you receive a statement of the expenses you have incurred with the credit card, the balance you have left to pay, the minimum amount you have to pay. and by when you must pay that amount to your credit card provider. The fee includes the cost of the items purchased on a deferred payment basis and interest on that cost.
I explained to Angele that interest works this way in most cases: there is usually about a month where a full payment can be made. There is no interest payment during this period. For extended payments over months, there are fees and interest charges. Interest is paid anyway if any amount is not paid within the first month. In many cases, there is also an annual fee charged for the privilege of using the credit card.
I underlined to Angele three important things on credit card debt:
- Credit cards generally have very high-interest rates – interest rates are calculated on what is known as an Annual Percentage Rate – which locally tends to range from 7% to 9%. That’s very high. This means that the longer you take to pay off your credit card debt, the more expensive your purchase becomes.
- Paying the minimum amount each month makes it feel like the debt is affordable. But this can be a terrible idea. If you are on a 0% rate for an introductory period, paying only the minimum each month will make only small inroads into your debt – and it could take ages, and cost a lot, to repay the balance, even if you don’t carry on spending.
- Some cards charge high late fees and other penalties. For example, if you miss a payment or go over your limit, you may be charged a penalty, or your interest rate may go up.
Thus, I emphasised with Angele that she should spend responsibly this Christmas and New Year period while looking forward to enjoying herself. I underlined that she avoids using her credit card on having a good time out – the result is that of entering 2022 with potentially a credit card debt that will be expensive to pay off.
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