Credit Cards
Credit cards – should you have one? For most people who have gotten themselves into financial trouble, I’d have to say the answer is a qualified no. Having one or more credit cards can create many problems – chief among them is that using credit cards makes it too easy to spend money. Some people estimate that using credit cards instead of cash can lead you to spend 12-18% more than you would otherwise spend. I can verify this from personal experience – the ease of using a credit card makes it very easy to over spend on unnecessary items.
The other problems with credit cards are the high interest rates and fees they charge. If you don’t pay your entire balance every month, the finance charges can really add up. For example, if you carry an average daily balance of $1200 on a card that charges 13.99%, you will incur $167.88 in finance charges every year (on a more typical 18% card, you would incur $216.00 annually). Some card companies use double cycle billing which can increase interest charges even more. If you’re late with a payment (even by one day), if you exceed your credit limit, or other reasons listed in the fine print of your credit card agreement, you can get hit with service fees and higher interest rates.
With these problems, why am I putting a qualification on the “no”? Because if properly used, credit cards can be an important financial management tool. Here are some of the advantages:
- Cash back — my American Express card pays back 3% on gas purchases. At current prices, that saves my wife and I about $75.00 each year in gas.
- Bill payment – Most of our bills are set up to automatically be charged to one of our cards. This saves us time and postage costs, plus we get 1% back from the card company. Not much, but every little bit helps.
- Building credit – For someone just starting out, getting a credit card, using it for small purchases, and paying the balance off each month is the way to build a good credit score. Despite what some people say about all debt being bad, the reality is that unless you’re rich, at the very least you will need to go into debt to buy a house.
- Saving money – in many cases, the best price for an item will be found at an online vendor, many of which only accept payments via credit card.
So, as long as you have the self control (or can acquire it), having credit cards can actually be a good thing. If you can’t (or won’t) use them responsibly, they can lead to financial ruin.
Cheers,
Ken