I had a finance professor in college tell me, “credit cards allow you to take a 30 day interest free loan and then in those 30 days you can invest that money to make a profit.” That is some of the worst advice I have ever received and this was from a tenured professor.
Past
If you talk to anyone over the age of 65 they will tell you of a world without credit cards. They carried around this thing called cash and paid for everything with the cash they had on hand. Then in 1958 Bank of America was able to successfully debut what we know as the modern credit card. They found a system where they could advance people money and then make money off of the interest.
Many of our own grandparents still cannot believe that a system is in place where you can take a loan and spend money you don’t even have. Many frown on it and refuse to take part.
Present
We have come a long way since 1958. Today everyone knows what a credit card is. They come in many types, they have various benefits, and they can even have your favorite sports team or a family photo right on the front.
Today credit cards are more common than any other form of payment. You can use them in Hong Kong and Amazon.com, not to mention most small businesses and every large business. They are incredibly convenient.
The problem though, as of March of this year the average U.S. household owes over $16,000 in credit card debt and credit card debt accounts for more than $750 BILLION owed nationally1. That is a lot of outstanding debt!
Additionally, study after study shows that those who use a credit card spend more, in some cases 18% more2. The reason for this is we do not get the same “money leaving hand feeling” as we do when we actually pay with cash.
Like my professor mentioned, many people use credit cards as a loan. Some even with the intentions to pay it off. However, then this or that comes up and they just pay the minimum payment. This causes you to pay so much interest it would make you sick to do the math.
Thankfully, Time.com did the math for us. They found that the average credit card interest rate is 15% and the average credit card has $4,717. Therefore, by paying the minimum payment it will take over 10 years to pay it off and you would pay over $18,000 in interest3.
No wonder our grandparents used cash to buy everything!
Evil or Not?
Contrary to what some of my finance colleagues think, I do not believe credit cards are evil. I actually like credit cards. I think the problem is actually that most people using credit cards are buying into marketing hype and many just aren’t thinking clearly when swiping the card.
I have a total credit limit in the high 5 figures. However, I make it a point to never think about my credit limit. Let me share a secret, a credit limit is a made up number given to me because the credit card company wants me to spend it. In fact, it is incredibly easy to boost your credit limit using a little trick, but I don’t want you to do it so I won’t share that.
Instead of thinking about how much the credit card company will allow me to spend, I instead think about how much I actually should be spending and how much of it is backed by my bank account. That is why I have the “dollar-for-dollar” rule. I am sure my family and friends are sick of hearing me talk about it, but I will NEVER put a dollar on my credit card unless I have an equal dollar to pay it off at the end of the month. You should never follow the advice of my finance professor and treat credit cards as an interest free loan, you are sure to get burned.
Your Choice
Many people think that a credit card can help them out of a jam. Or they can live a better lifestyle by using a credit card. That is what the credit card company wants you to think. But in reality if you want to break out of living paycheck to paycheck and start living the life of your dreams, you need to instead only spend money you can already account for and not a dollar more.
Credit cards can be a great thing. When used properly they offer increased security, convenience, and even free trips or gift cards. But when used incorrectly they WILL destroy your life.
Your Financial Freedom Partner,
Joel Parker
Sources:
1) https://www.valuepenguin.com/average-credit-card-debt
2) http://www.forbes.com/sites/moneybuilder/2010/11/12/credit-card-tips-for-holiday-shopping/
3) http://time.com/money/4213757/average-american-credit-card-debt/
