4.3.7 Case study: Credit card use

Leila was on her way home from work when she passed an electronics store and saw a stereo system in the window. It was exactly what she'd been looking for: state-of-the-art speakers and the latest interactive features so she could link the system to her laptop. On sale, too!

The sale price was $1,275, more than Leila had been planning to pay. But just think how much she was saving compared with the regular price!

She put the stereo on her credit card, knowing that, with the other charges already on it, she was right at her credit limit. No matter. She'd pay down her balance as soon as her paycheque came in.

A few days later, Leila saw an ad in the paper: "Sun-soaked Caribbean holiday!" The ad went on to talk about the pristine beaches and fabulous all-inclusive food and drinks.

"I deserve a holiday," Leila thought. The only problem was that she couldn't use her credit card—she still had the entire balance to pay—and didn't have the cash in her chequing account. What to do?

Then she saw a sign in a bank window: "Low introductory rate on new credit card accounts!" It wasn't Leila's bank—but there was no reason she couldn't get a credit card with them, was there? And with the low interest rate, she should be able to manage the payments on both cards. She applied for the card and booked the vacation.

Several months later, Leila was looking at two huge credit card bills. She owed $220 in interest on the $3,000 balance on her first card. And now that the introductory period was over, the interest rate on her second card had jumped from 10 percent to 19 percent.

With a sinking heart, Leila realized that she was going to have to cancel her trip. She'd pay a penalty, but she just couldn't afford it.

Lessons Leila learned:

• It's best not to borrow more than you can afford. A credit card does not increase the amount of money you have, it just gives you a way to pay for things.
• The cost of interest adds to the total cost of an item you are buying if you tend to carry a balance on your credit card.
• You should be aware of all interest charges, fees and limitations when you apply for a credit card.
• You can resist impulse shopping by leaving your credit cards at home, keeping a low credit limit on your cards and "sleeping on it" to see if you really want the item the next day.