Completely Ignorant Credit Card Question

Ok, so I made some mistakes and lost a good amount of money playing online poker as well as at the casino. My next credit card bill will be for slightly over $1000 (I am in college, with no job). I could pay it off, but it would be quite painful to do so and would leave me with little cash. Should I just not use the credit card for awhile and pay it off over a few months (in say, $300 installments)? What exactly does a 16% APR entail; does that mean like 1.5% interest a month? If so, that isn't so bad, I can get a job and pay it off. Will not paying in full affect my credit rating? It seems like many make the minimum payments on their bills, but I have always paid in full. Any comments appreciated.


Jeff

Jeff,


These are all good questions and show good sense. Don't leave yourself without cash unless it burns a hole in your pocket. The big thing is to pay on time and at least pay the minimum. In your case you can pay more then the minimum so do it and do it as soon as you get the bill.


If anything, card companies don't want customers to pay in full since they don't make much money on annual fees and merchant charges alone. But paying in full doesn't hurt your rating, however; it may mean that your credit limit will not increase that fast for that card (which may be a good idea in your case). Credit limits tend to automatically increase when you are near your limit yet are paying more than the minimum and on time. OTOH, some day when buying a house or car it will hurt you if the lender sees that you are maxed out on your cards AND/OR have large available lines of credit that don't make sense in relation to your income.


Note that I'm not a credit expert but I'm farily sure this is reasonably correct based on what I have read over the years.


Regards,


Rick

Jeff,


Pay just the minimum. Set up a small company. Make yourself an employee. Use the credit card to buy things from the company. Use your new "job" and good credit to get more credit. Create a cycle of wealth.


When you get yourself a big bankroll, play high stakes poker against non cheats. That'll be tricky.


If you win, pay off the bills, and keep the change, If you lose, declare bankruptcy, as is the American way. The average wealth of people that have declared bankruptcy is far higher than that of those who haven't.


Oh, ya, by the way, all this is completely legal.


Ivan Milken Jr.

Burn the credit cards now. Never return to the syber poker tables. Return to your studies, forget about poker. It will ruin your life forever. Get a good job, find a girl friend, stay out of poker rooms. Never gamble with a credit card ever again.


SPM,...a poker junkie who is never allowed to have a credit card...

pay it off as soon as possible. not even big companies can survive paying 16% interest on money. forget about using a card that you cant pay off every month it will keep you in the poor house. good luck.

Jeff,


Pay it off with a low interest CC that you always get once you have a CC. They usually give you a 6 month 2.9% or lower interest rate. Start a spreadsheet in your computer including date of when your rate will change and make monthly payments to pay if off in a year or whatever you decide. Cut that CC up!!! After that 6 month period or in the 5th month pay the rest of it off with another CC that offers you six month credit at 2.9% or lower. Continue doing this until you pay off the debt.


In the future I would advise you to find a bank that allows you to use a DEBIT card for your gambling. Taking money out of your own money is harder for me than to just add it on a CC. By the time you graduate and get a job you'll have learned things that took me 40 years to learn!!!!!!!!


Good Luck Paul

I have made a vow that I wil NEVER play Internet poker again, no matter how tempting, and I will never bring my ATM card or credit card to the casino (as my $500 cash advance taught me). I am going to splash around at the low limits for a bit (like 5-10) and bring like $300 and if I lose, that's it. Besides, I don't get to the casino that often while at school (in DC, thankfully rather than home in philly...1.5 hrs from AC).


Jeff

Maybe you should quit gambling altogether.

16% sounds ridiculous, doesn't it? Yet, you will be paying at a much higher rate than 16%. Credit card companies charge interest on the average daily balance in the account over the billing period. So, for example, if you owed $1,000 for 29 days, paid $900 on the 30th day, you would think you would pay 16% interest on the amount you still owed, $100, at the end of the billing cycle.


No so. They average out your daily balance, which would be $1,000 x 29 plus $100 x 1 = $29,100 divided by 30 = $970. So even though you only owe $100, having paid off $900 of the $1,000, you pay interest on $970. So the percentage you actually pay is much higher than 16%. In the example I've just given, they would charge you $12.93 interest on the $100 unpaid balance, which is an annual rate of 155%.


Pay off as much as you can as soon as you can. Don't gamble with money you don't have or can't afford to lose.


Not paying in full will not damage your credit record. Not making the minimum required payment on time will.

I have a bit of a different perspective on this because I am just finishing up college and understand the dyre finacial situation that any non-trust-fund student is in. I think there is nothing wrong with accumlating some credit card debt while in school. The quality of life can be improved greatly by going in for a few thousand. The way I look at it, I already owe 35K in student loans, so what's another 3K or so to buy decent clothes, eat well, and have a few nice things? Sure, the interest rate is high, but they it is not ridiculous. It's about the marginal value of money. If I have $5000 now, it will improve my life much more than the $6000 I will have to pay back when I actually have money. Also, if you are planning to work a decent internship in the summer, you can pay it back then. For instance, I ran up between 2K-3K my Junior year, but I was easily debt free by the end of the summer. If you have an employable major at a decent school, you should have no problem paying off a reasonable amount of credit card debt (not 10K or something) when you graduate and are making 35-60K with no dependants.


That being said, I thing it is a horrible idea to fund gambling with money you don't have. I used credit to by nicer things than I could actually afford but I never gambled on credit, only with cash on hand. It is too easy to dig yourself a hole, then try to get out by gambling more (I have seen people do it). It is silly to think this could be a profitable endevor in any way. Assume you take a $500 advance. What are you going to do? Grind it out at the 1-2 for a SB an hour? And you'd better be pretty damn sure you can beat the game if you are going to do that. Even if you play above your bankroll constraints and win, you are bound to go bust eventually because you will keep playing at that level since you now think you can "beat that game". Trust me on this, it doesn't work. I picked up the game quickly, saw some big early wins, and thought I could beat the game before I knew anything about bankroll management and variance(at least as relates to poker). Then I hit my requite "you really know nothing and YOU SUCK" downswing as I like to call it. After a few thousand hours of studying and playing, I can now say with 2 or 3 SD's of certainty that I can beat the game. It took a lot of work, however. So use that credit card to buy poker books, game theory books, and math books. Play free games and tourneys until you are sure you can beat them. Save a little CASH here and there so that you can play again sometime if you so desire. Remember that the mathematics/game theory behind poker is a good thing to learn even if you never play again, because many of the same principles are applicable to economics, investing, computing, and more. I have a feeling that this is where your game and judgement may be lacking given your situation and lack of basic knowledge about interest rates, etc...


In summary, don't gamble with money you don't have. If you intend to play again, study your ass off, save some money you can afford to lose, and have fun taking a shot. Don't get bent out of shape about the 1K. Just pay 200 a month or whatever you can afford and take it as a lesson (you had fun right?).


Also, in response to the post about getting low interest introductory rates and continually switching cards, I have heard that it is looks bad on your credit report if you switch cards too often. I never really looked into this because I am not a big card switcher, however, so I may be totally wrong.


Godspeed,


Glenn

ummm...you owe $1000 for 29 days and $100 for 1 day so it makes sense that you would pay interest on the average daily balance. You could use the same arguement to say you were paying less than 16% on the $1000 for the first 29 days. The interest rate is higher due to compounding, but I don't think your statement is valid unless I am missing something.


How they calculate the finance charge:


Average daily balance * Daily Periodic Rate * Days in Billing Cycle


The daily periodic rate is just the APR/365. The average daily balance is the arithmatic mean of the balances at the end of each day in the billing cycle.


The finance charge is added monthly, so the interest is actually compounded monthly. This is where you lose a bit.

If I pay $300, that leaves me with a $700 balance. So next month my credit statement will say what (assuming 16% interest)? Will I owe something like $710.50 (assuming about 1.5% a month) or is it 16% on the balance every month (Like I would now owe $812). I think the former is right, but I'm not sure. If it is the latter, I am just going to bite my lip and pay it all off. $10 a month doesn't sound like a bad deal if I can pay it off over a longer period.


Jeff (Stupid, I know, but working on it)

For instance:


Say Average Daily Balance for the billing period is 2509.02.

APR = 9.89%

This makes the Daily Periodic rate 9.89%/365 or .0271%.

If there are 31 days in the billing cycle...

.000271*31 = .008401 or .8401% intrest for the cycle.


multiply this by the average daily balance....

.008401 * 2509.02 = 21.07


This is your finance charge for the month. Interest is compounded each billing period, so you are actually paying more than your APR in interest per year. It is a small amount, however. Something like .68% extra with a 12% APR, about $7 extra a year ($127 not $120) on a 1K balance.

The 'A' in APR is 'Annual' - i.e., not 16% per month as you seem to fear here. The amount you'll owe rolling $700 for a month will be close to the $710 figure you quote (assuming you've made at least the minimum payment the month before thereby not incurring late charges).

. . . since you're in an institution of higher education. It is insanity to assume a debt at 16% for any length of time. The amount owed would double in about 4 1/2 years at 16% if no payments were made.


Another thing. Don't worry about credit rating. That is mostly a myth propogated by high interest lenders who want to trick you into doing things like - assuming 16% interest!

1) Quit playing poker on-line

2) Quit playing on-line poker

3) find a low interest credit card (below 5% now) or loan from a bank below 8%.

4) transfer the balance and start paying off

5) stop playing on-line poker. It's a sucker's game.

6) Don't bother to read below this note