Chapter Four

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Minimize Credit Card Debt

Understanding Credit As Money

What is money today? Historically, money took the form of metal coins issued by the
controlling authority (government) of the period and that people
accepted for the exchange of goods and services. Over the
years other tangible items have been used for trade and
exchange. Animal pelts and furs come to mind. In modern
times, money has largely been represented in the form of
credit, that is, trade facilitated by the promise of, or reliance
upon, payment from a trusted source, and of course the most
common of these instruments today is a credit card. The
distinction between money and credit are in the words
“promise” and “future payment”. It is here where money and
credit differ.
When you use credit to pay for something, you’re not actually paying for it but rather the
seller is relying upon a promise that he/she will be paid. In other words you’re buying
something today with money that you don’t necessarily have at the time of purchase. The
person to whom you are making that promise needs to have the assurance that your word is
as good as money, and because they don’t know who you are they are probably not willing
to take your word for it. However, they will rely on the promise of a highly trustworthy source
who will vouch for you. That source of course is the bank that issued your credit card. With
this reliance on your bank, the seller is willing to accept the promise of a trusted third-party
for payment of your purchase just as though it was actual money. With this understanding
between both buyer and seller, credit and money are the same (for the purpose of trade).
Beyond the facilitation of trade, credit takes on a life of its own when compared to the use of
money for doing business. The bank that issued your credit card makes the actual payment
for your purchase while at the same time relying on your promise to repay them. In doing so,
they charge you a fee for the use of their money – the money they paid the seller on your
behalf. That fee is commonly expressed as an “interest rate” (not to be confused with other
fees such as penalty and late payment fees). The interest rate is a mathematical expression
of the cost of using the bank’s money for a year, such as X percent per year. As a consumer,
you have a choice on selecting which credit card to use. There are literally hundreds of
banks that issue credit cards but as wise people, we choose the one with the lowest interest
rate. To that extent, most people think that the interest rate they pay for credit is the most
important aspect of credit itself – and they would be wrong. It is not the interest rate that’s the
most important consideration when buying on credit. The single most important aspect of
credit is having the availability of credit in the first place, and not the rate. The interest rate is
actually secondary.
When a credit issuer makes you an offer of credit, the offer must be accompanied by a “truth
in lending” statement that explicitly shows the cost that you, the consumer, will pay for the
use of borrowed funds, that is, the money the bank will pay on your behalf, plus also the
conditions which you must abide by in accepting credit from the bank.
It’s important to point out that the actual dollar cost of purchases made using credit card is
open-ended if you don’t pay the full credit card balance at the end of the statement period
(usually monthly). Expressed another way, when you make a purchase using a credit card
you really don’t know how much the purchase will cost you. The actual amount will be based
on when you pay the complete balance and if you pay by the due date. Otherwise, the bank
will add an interest charge and possibly other fees, such as late fees. For example, you buy
a television for $400 using your credit card and you pay for that TV over four statement
periods. By the time you pay the full amount, that television can cost you closer to $500,
depending upon the interest rate you are charged and if you made any late payments during
that four-month period.

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