Credit cards are a great boon for the consumer – used wisely. Otherwise credit cards can easily become a hassle, which turns into a significant headache, which can progress into a terrible nightmare.
When dicussing the issue of credit cards, a few cliches come to mind:
“There’s no free lunch.” “It makes a better servant than master.”
If you are an American you are acclimated to living in a sea of consumerism. The illusion of credit seems to make having what you want, when you want it, possible. Unfortunately, you can’t have your cake and eat it too – in the long run. A delinquent credit card balance with an interest rate approaching 30 percent can double in about two years without any payments, when late fees and other penalties are included. We have all heard horror stories about people with up to $100,000 and more in credit card debt, which only the most affluent people would be able to carry.
I have a personal formula that almost ensures that I will never be in debt. While your financial goals and lifestyle may not entail you wanting to include all of the elements of my plan, I’m sure that following some of them – and you may already be doing so – will help prevent you from falling into the credit card trap.
1) I only carry one credit card. (See my article about only carrying one credit card.) I don’t need more than one and anything I need a credit card for, I can obtain.
2) The limit on my card is relatively low and I have not asked for a higher limit. It’s pointless to have a $20,000 limit – or higher – on your credit card. If you need that much money, obtain a loan from a bank. If you can’t obtain a bank loan, seriously consider whether you should be borrowing via your credit card.
3) I called my credit card company and asked for a lower interest rate on my card (see my article about asking for a lower interest rate for details about what happened). Interest rates are historically low and you can “vote with your feet” if your credit card company won’t play nice and lower your interest rate.
4) If I charge anything I make sure I have enough cash to pay off the balance and I have never paid any interest charges on a credit card (see my article about paying cash for everything). You can pay interest on your credit card, or use the money you would have paid in interest to buy necessities, luxuries, or anything else you want.
5) I have a savings account that I opened over the Internet with at least six months of living expenses, which is my emergency money. I use that as my credit card, and only in urgent circumstances. Best part of that deal? I charge myself 0% interest. (Economics nerds would point out the opportunity cost, which is irrelevant if you need food or gas very badly.)
Part of a healthy financial plan includes spending money as well as saving it. It takes discipline and looking at the big picture to resist the credit card trap. Credit card companies make so much money because consumers serve them, not the other way around, as it should be.