Ah, credit cards.
A source of convenience for some, a nightmare for many.
If I was given $1 every time anyone at an online personal finance forum exclaimed: “Guys, credit cards are evil! Credit card companies are ripping us off. We should all get together and have a credit card bonfire!”, I would have a lot more money than I have today.
No matter how we feel about credit cards, the ultimate truth is that they are just a tool.
They just magnify our behaviors and patterns.
They just show us who we really are down to our very core.
In essence, they are our reflection in the world of financial education.
If you use them carefully, they reward you.
If you go on a shopping spree with an utter disregard for who will settle the balance and when it will be paid off, you will probably not sleep peacefully at night.
I personally believe that most credit cards have benefits which far outweigh their costs.
Let’s take a look at how credit cards help you:
Now you might be asking, if there are so many benefits to credit cards, why are the masses always hating on them?
Well, to be fair, the masses don’t really hate on credit cards in the beginning.
People get introductory offers for credit in the form of an online invitation, a snail mail to their home address, in their college or university if they happen to walk by the local bank branch etc.
Since most people are offered a credit card limit of at least $1000 at the beginning (at a teaser rate), they think of it as free money.
And since most people are undisciplined when it comes to going on a shopping spree, the “free” money gets used up quickly and the credit limit is reached.
It is the same behavior we follow when our favorite aunt graciously gifts us $1000.
Do we save the $1000 for a rainy day?
Do we invest it somewhere we hope it will grow over time?
Do we value the gift of $1000 the same way we would value $1000 had it been the result of our sweat and tears?
Most of us are programmed to use the gift (translated: free) money to buy clothes, movies, electronics or simply take our friends out for lunch at a fancy place.
This is exactly where the issue lies.
Credit cards themselves aren’t really bad or evil.
It is our lack of discipline on an aggregate level which turns them into a nightmare for us.
So even if we follow the mainstream advice and “cut up our credit cards”, we will still not benefit much. This is because if we are programmed to binge shop or spend money without thinking the spending process through, we can use a debit card or our bank balance to finance the purchase.
A really good friend of mine, while unemployed, purchased a $700 laptop on his credit card. Since he didn’t have the money, he was forced to make minimum monthly payments.
He paid around $30-50 every month for 18 month until I got to know about the situation and urged him to pay the balance off ASAP.
Long story short, he paid around $1250 in total for something which would have cost him only $700.
Why he purchased a new laptop when his 2 year old laptop was working just fine is beyond me (I have a 5 years old Acer laptop that I love and I have no intention of buying a new one).
Anyway, back to credit cards.
Since a lot of people still seem to think credit cards are out to get them, it got my thinking.
Why do people not think of credit cards as just a tool?
Why are they so “reckless” or “carefree” when it comes to using them?
And finally, why are people so oblivious to the fact that the interest charged on their credit card debt is over 20%?
Here is what you need to know:
I know I sound a little cynical but that is not the aim.
The aim is to help you understand how making use of credit the wrong way can turn out to be a disaster.
Remember, credit card companies would actually love for you to keep on making the minimum payment towards your credit card balance.
The only thing that stops them from getting too comfortable is the fear that you might become delinquent and declare bankruptcy.
And this is exactly what happens to people who do not keep their bad debt in check.