I grew up with a fear of credit cards. To me, they were debt traps, designed for the undisciplined to be taken advantage of. I myself, was caught up in biting off more than I could chew. When I turned 18, I was getting approved left and right for store cards and credit cards. Naturally, the first thing I did was get a PS3, and loaded up on other useless things I couldn’t afford… and then 2008 happened. Needless to say, I learned many lessons about finances that year.
It took a long time for me to get another credit card, but today I have several in my wallet, and I never pay cash or debit. Unless the merchant doesn’t accept credit cards, I always pay with plastic. So what changed? Simply put, I began to apply the following concepts to my finances, and the results have been amazing!
You Can’t Afford It
This is probably the single most important thing you can take away from this article. Credit cards make it (seemingly) easy to buy things you don’t quite have the cash for. Just swipe, and enjoy the instant gratification of owning a brand new [insert useless thing here]. All you have to do is pay a low minimum payment of $35 a month, right? Wrong! Often times, a minimum payment isn’t even an interest-only payment. What that essentially means is you’ll be paying interest on interest if you constantly make the minimum payment and carry a balance.
The simplest and most beneficial way to avoid all of the biggest pitfalls surrounding credit cards is this: if you can’t afford something–don’t buy it. If you don’t have the assets or cash in reserves (meaning you’re not tapping into other parts of your budget) to pay for the thing you’re buying, no matter how many ways you try to convince yourself you can or should do it–you can’t, and you shouldn’t.
Don’t Carry a Balance
OK, so you saved up for that 4K OLED TV you’ve been dreaming of, and you just have to have it in your living room ASAP, so you decide to pull the trigger. But after all that saving and waiting, it’s hard to part with the cash, so you think to yourself, “I’ll just pay with credit and pay it down in 2 or three months”. Unless you’re on some 0% interest offer, this scenario doesn’t benefit you. It’s certainly better than making minimum payments, but our goal is financial independence, and we should not be in the business of giving credit card companies free money, which is exactly what you’re doing when you carry a balance.
The average credit card interest rate is 20%. That’s the average! That means you might even be paying more than that. That adds up over time, because remember, you’re not paying interest one time on the amount of the purchase, you’re paying interest on the remaining balance on the account every single month.
The best way to use your credit card is by paying your balance off before the end of every period.
Get Something Back
At this point you may be wondering why I advocate using credit cards at all instead of cash if I’m against carrying a balance. It’s simple: cashback and points. There is this misconception out there that paying cash somehow gets you a better deal. That might be the case with small retailers that don’t want to pay the credit card company transaction feed, but just about everywhere else, sellers are INCENTIVIZED to produce debt. Why else do you think the Target cashier is always nagging you about getting their credit card?
The reality is that if you’re using the right kind of plastic, that is, cards that give you points or cashback, you’re almost certainly getting a better deal right off the bat. For example, the Chase Freedom Unlimited card will give you 5% in cashback on certain categories of purchases. Depending on your situation, some points cards might yield an even better return. Just for swiping.
In Summary
So should you be afraid of credit cards? Not if you develop the right strategy for using them to your benefit. Discipline and planning are important components of healthy finances, and doubly so when you’re dealing with high-interest loans. Some people see it as delayed gratification. I see it as expedited financial freedom. Cheers!
