FINANCIAL INSTITUTION offer you a generous line of credit or increase your credit card limit. You think to yourself “ah, I have made it, and finally someone recognizes my achievement”. But before you get carried away, you should stop for a moment and really think about what this access to credit means to you and also the financial institution offering it. You can do this by analyzing how each party maximizes their benefit from this “credit offering”.
FINANCIAL INSTITUTION benefits the most from their relationship with you when:
1. You max’s out your credit card
2. You makes only minimum payments
In this scenario, Financial institution get the highest amount of interest payments from you.
YOU benefit the most from your relationship with the financial institution when:
1. You pay the least amount of interest to financial institution (where $ 0 is the best case scenario).
2. Use credit when you can pay it all back before the next due date.
2. In times of emergency, you use credit, but pay it off as quickly as possible to minimize total interest payment amount to the financial institution.
Don’t feel sorry for the financial institution if you use your credit line/card and pay no interest. Keep in mind that each time you use your credit card, the merchant or business where you use the card still has to pay up to 3% or your purchase as a transaction fee to the credit card company.
Bottom line: Apart from emergency situations, avoid credit purchases when you know you cannot pay them off at the next due date. (buy only what you can afford and postpone other purchases until you saved enough cash to cover the purchase)
