The Good, Bad and Ugly of Credit Cards
Credit in general is a useful concept. Say Adam wants to grow some wheat; all that fruit is backing him up and he needs some fiber. He goes to the snake to borrow a few bucks to buy some seed. If there was no such thing as credit, there would be no seed, no wheat, and Adam would get a lot of reading done while sitting there…
And credit cards are useful creations. They make paying for things smoother and faster. Compare Granny paying the bill for her industrial strength razors (to shave her hairy back) by check to a three-minute trip online to schedule an online payment using your Visa. The old-fashioned way was to find the bill, write the check, wrestle it into the envelope with the little payment stub, gag from the taste of the envelope glue, find a stamp, and then finally remember to put it in the mailbox.
But—and it’s a big wide but—history shows us that people tend to get in trouble with credit cards. Sometimes they wind up owing lots of money that they didn’t really intend to borrow in the first place. It’s a big deal. Consumers (that’s us…you and me, consuming) don’t fully understand how much credit cards cost.
And it’s easy to over-spend with them. When we spend cash, it hurts (transactional pain); we watch our hard-earned money cross over into someone else’s hands. It hurts less using a credit card because we’re spending money we don’t have yet. Paying cash and check causes you to buy 30% less than if you used credit cards. On average, if a person buys on credit and carries a balance month to month (they don’t pay it off the next month), then they usually end up paying 2 or 3 times as much for the item over time, than if they’d paid cash.
That’s part of why Congress passed the Card Act, to help consumers get educated about credit cards so they can use them more carefully. Because credit cards are an excellent financial tool WHEN USED WISELY.
Take Frank and Kathleen. They’re “convenience users” of credit cards. They use their credit cards to pay for most everything they spend according to their monthly budget. At the end of the month, when they get their statement, they pay the entire amount due. All of it every month—so, they don’t build up a balance. By using their cards, they don’t have to worry about carrying cash, they have money on hand for whatever comes up, and they get reward points for what they spent.
In early January every year, Kathleen goes online to their credit card account and downloads an Excel file containing every expense they had, already sorted into the expense categories she uses to file taxes. Voila! Their taxes are done in record-breaking time. Then, she treats Frank to a weekend in the Caribbean using the reward points they earned.
This class of credit cards users are “convenience users”; those users who carry debt balances are called “revolvers.”
|Good things about credit cards||Credit card pitfalls|
|A slick way to pay for things||Super-high interest rates and cost of borrowing money|
|Accepted almost everywhere||Things wind up costing 2 to 3 times more if you don't pay it off right away|
|A useful way to prove you are who you say you are||It's easy to spend more than you planned|
|People impressed when you flash a platinum card||Unintentional build-up of debt|
|Gotta have them for some purchases (rental cars, hotels, online)||Card rates and policies can be head-scratching to figure out|
|Use other people's money for a month||Crooks can steal your card info and charge things on the sly|
|Helps make ends meet when money's tight and the belly's big||Unexpected fees and charges are common... whoops! Jason went over his limit and a $35 fee magically appears on his credit card statement|
|Keeps track of what you've spent in different expense categories (food, car, fun)||Sudden rate hikes (like when Alice paid her bill late and boom! her interest rate skyrocketed from 14.99% to 19.99%|
|Debt repayment seems endless if only minimum payments are made|
|Late payments really hurt credit score|