My first job was in 1992 at a department store which is no longer in business named Gayfers. If you are not a native Mobilian, you will not have a clue what I am talking about but trust me, it was THE place to shop. Deals galore. Everything you need. All in one place. Two stories of fantastic displays, enticing aromas, and brightly-colored sales stickers.
I was pleased to work in one of the more exclusive parts of the store, an area dedicated to designer fashions for ladies. That was when I first set my eyes on labels like Liz Claiborne and Karen Kane.
During the slow season when you could not beg a shopper into the store, I would browse the clearance racks and score great buys made even greater by my employee discount. It was among those racks that I got to know one of the store’s personal shoppers. She was friendly and very encouraging. She was so encouraging that through my relationship with her I opened my first Visa account, a Discover account, and two Gayfers store accounts.
At the height of my credit card frenzy, I had eight cards… totally maxed out. Using one credit card to pay down another.
The truth is, many credit card companies target young people and have them signing up for credit before they are even legal to make other life-altering decisions.
The Credit Card Temptation
Apply today and save 20% on your purchase!
The companies make it so perfect… Almost like you would be wasting money if you did not apply. Lies, misconceptions, and traps.
“Wow. Sounds great. I was going to have to pay $150 for these items but with that offer, I will only have to pay $120. Score. What a deal. My husband will be so proud.”
Think again.
Break Down the Deal
You saved $30, correct?
In 30 days, you will get your first bill which can boast an interest rate as high as 36%… legally. For the sake of this argument, let’s assume this new card carries the median rate of 22% and the rate applies on the average daily balance.
You went shopping on the 15th. For 14 days, your balance was $0. For the rest of the month (16 days), your balance was $120. The average daily balance would be $64. ($0 x 14 + $120 x 16 / 30 days)
Your 22% interest rate applied to your average daily balance would be $14.08. ($64 x 22%)
How much did you save? $30… minus your interest payment of $14.08… You only saved $15.92. IF, if, if, if if… you pay the balance in full before the due date.
Keeping the Deal Real
Just because I feel argumentative, let’s say that you pay the minimum balance due of $20 and plan to pay it off in full at the end of the next billing cycle. You are REALLY good and do not use the card again that month so your balance maintains at $114.08.
With average daily balance at $114.08, your interest fee at the end of the month will be $25.09.
You have now spent an additional $39.17 on your purchase which is $9.17 more than you saved in the first place!!!
Do you still think that is a deal?
And, let’s be honest… will you pay off that credit card and never use the account again? Or, will you be like I was and have the best of intentions blow up in your face to the tune of a 28% interest rate?
Is a credit card a tool or a trap?
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I am confused by the early math here. If I pay my bill at the end of the first month, I do not pay any interest, etc. And yes, that is what I do each month, except when the post office decided to loose my mail when we transferred addresses/moved.
That is wonderful! Not many people pay credit cards with that type of diligence. 🙂