Credit Card Coffee

David Sklar & Associates – Toronto Consumer Proposal and Bankruptcy Trustees,
Share the Lessons of Successful Debt Management

Recently we noticed an ad that perfectly addresses an approach to credit that has landed many Greater Toronto Area people in financial trouble.

A major credit card (in the USA) is running a promotion that suggests that every time one of their customers uses their credit card (they use the example of a cup of coffee) they have a chance to win a million dollars.

What’s so wrong?

If you always pay off your credit card balance every month, not too much is wrong. But, if you are not able to pay off your credit card – and are just getting by paying the minimum – there is a whole lot wrong. By the end of the first year – this $5 cup of coffee could end up costing $5.90 – ($5 at 18% per annum).

OK so what? Let’s say you buy a $5 cup of coffee every day on your way to work – and that you work 50 weeks a year with 9 statutory holidays, that means you will be buying 241 5$ cups of coffee per year at a cost of $1205. Add interest and you could end up paying an additional $216 for a total of $1421.

Beyond costing you substantial interest charges – using credit for coffee and other small purchases:

• reinforces using credit, and
• increases your credit card debt (small purchases add up – fast).

Buying a coffee on a credit card means you are taking out a pre-authorized loan for a cup of coffee – think about it. Taking out a loan to pay for a cup of coffee. To make it even worse, putting consumables (such as coffee) on a credit card means you will be paying for those items long after they are a distant memory.

You could win a million dollars – combining the increased use of credit and gambling seems like a good match. For the credit card company, it appears to be a marketing ploy to reduce consumer reluctance to use credit for small items. According to them, the more you use their card, the more chance you have to win. In reality, the more times you use credit on minor items, the more chances you have of losing your own financial security.

Paying cash is better?

Yes, but in this case are you sure you want to spend $1205 per year on coffee? Could you think of something better to do with $1205? We would never suggest doing without coffee (we drink too much of it ourselves) but we are suggesting that maybe you should wait till you get to work to get that coffee. Even if you have to buy your coffee at work, it is not likely that it will cost you $5 per cup.