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Highlight of The Glass is Half Full: Crushing Debt- Why You Should Pay Off Your Debt

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station description Let’s face it, life can be tough in many ways. Here on the Glass is Half Full, we f... read more
The Glass Is Half Full Talk Show
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Duration: 06:22
In this episode snippet of The Glass Is Half Full, Richard Killen a Licensed Insolvency Trustee interviews David Trahair, Chartered Professional Accountant, a personal finance writer, and trainer. He is also an author of six books on personal financial issues including three national bestsellers.
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In this episode snippet of The Glass Is Half Full, Richard Killen a Licensed Insolvency Trustee interviews David Trahair, Chartered Professional Accountant, a personal finance writer, and trainer. He is also an author of six books on personal financial issues including three national bestsellers.
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So I believe that the real problem is with the ease of availability of this revolving debt, the ease of availability of getting credit cards, for example. Um, because people aren't forced to pay it off, they don't. They end up just trying to cover the interest, just paying the minimum payments, uh, bumping up to that credit limit and then just staying there. So I think that's the main distinction. Is those two types the the ease of availability of the revolving credit is the big problem today. As I see it, Mhm you you mentioned in your book the concept of borrowing binge because the way you refer to it, yeah, it would appear to me that revolving credit, as you describe it, lends itself more to the this idea of a bordering binge than fix credit for sure for sure, because, uh, it's essentially cheaper to get you think about your cash flow. You're allowed to go on by something that you don't have the money to afford to buy, and then all you have to pay is a is a small monthly amount. Thereafter. If you bought a car house, your payments are much larger because a good chunk of that is the principle that you're required to pay back. Uh, I mean, the other interesting thing I find is that this concept of good debt versus bad debt and I guess it's similar to the revolving and installment. In some ways, I mean, good debt is generally seen as installment debt. For example, a reasonable mortgage to buy a home is usually considered good debt. Uh, because you're acquiring something that hopefully is gonna appreciate in value. So you're you're making a good investment, so long as you can afford it. Um, another example of good debt is often, uh, student loans. You know, you're borrowing to get educated so you could make more money in the future, right? Bad debt often is revolving debt. So you get a credit card, you know you can't afford to pay back, and you go on a great vacation down the Caribbean that you want to go on. But you can't afford to pay off that credit card when you come back. Uh, so it's expensive revolving credit without any associated asset. No investment that you've got. It's just just fun. Interesting you mentioned in your book that you Canadian Bankers Association. Is it that, uh, some kind of a survey study that indicated that 56% of people using credit cards pay them off monthly leaving, leaving the Kerala re that 44% don't. That's exactly they're carrying debt from one month to the next. That's that's exactly right. These numbers surprised in any way. Um, yes, I would say they surprise me. Um, I would have thought, uh, fewer people pay it off. The problem with that statistic from Canadian Bankers Association, which is the spokespeople for the big banks, is that it's based on survey data. So they've surveyed people and asked them whether they pay off their credit cards. Uh, so you gotta take it with a grain of salt. What I would like to see is I would like to see banks General Ledger showing me what the receivables are. The banks will obviously no, it's their business. You want to see the what produced those numbers? Exactly. I want to see the raw data. How many credit card revolvers are there? But if we assume that numbers right, then 44% of the terrible number that's approaching half the population can't afford to pay off their credit cards. And I've been writing about and thinking about personal finance for almost a couple of decades now, and I can't think of a worst investment than I. Revolving credit card debt often is a 20 or 20% or even more than that. It's the worst investment you could make because that interest is calm, pounding against if it's if it is debt. In other words, if it is not paid off, correct. If it's paid off at the end of every month, most credit cards don't pay any interest at all. That's right. That's right. I mean, you know, if you can afford to pay it off every month, credit cards a great thing, right? You buy something, you have to pay for it for three weeks. There's no interest charges, but if you can't afford to pay it off, the table is totally flipped into. I would, I would say, one of the worst investments. You could possibly make great investment for the financial institution that you owe the credit card debt to because they're recording interest receivable of 20% or more. But compound compound ID, usually monthly eso compound is great for them. It's great for the investor, the person who is advancing the money. But it works against you when you Oh, perhaps because I'm a simple country going all that you could explain the idea of compounding to make sure I actually looked into this, uh, for an article I wrote for C. P A magazine a couple of years ago. And basically, what it means is, say, you've got a 24% interest rate on your credit card. Uh, many credit cards use an average daily value method of calculating the interest. Eso What they'll do is they'll they'll say Okay, at the beginning of this credit card period, say you owe $2000 then they literally calculate how much you owe them every day during that period. So you buy something for 100 bucks that your balance goes up to 1100 you make a payment. It goes down so they get the average daily balance for that month. Then they multiplied by the 24% interest rate per year times. Whatever the the number of days in the period is, say, 30 essentially a month's worth 2% Yeah, yeah, 2% or 30 divided by 365 And then they add that to the amount you owe at the end of the month. So essentially this method means that interest is compounding monthly because the interest gets added to the balance and then that next month it's included in the balance that you're paying further. Interesting. So this becomes the famous story of being interest on interest. Interest on interest is terrible when you Oh, it's great when you invest. Compounding interest is great when you invest in like a G. I see. In fact, you want a more frequent com pounding period when you invest. But when you're on the other side, it's it reverses. That's the worst thing. The G I see is
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