This is another installment in our Financial Independence Series- a series of articles complete with advice and strategies that most anyone can implement right now to help move closer to financial independence. Be sure to read the other entries in this series and start saving today!
Among the financial instruments that can damage a family’s finances, the one that is most often demonized is a credit card. Irresponsible use of credit cards, it has often been said, can cost the cardholder a large amount of money and can get in the way of financial independence. But are credit cards really so bad? Let’s take a look:
Credit cards do, indeed, represent a potential threat to financial stability. Credit card interest is usually higher than the interest on other debt. It can range between approximately 13% and 24% annually and, over time, can cost the cardholder a large sum of money if the balance isn’t eliminated swiftly.
The financial problems with credit cards are numerous. They represent temptation for some people. It’s so easy to pull out a piece of plastic to pay for something that some do so without a second thought. The constant payment of interest adds significantly to the cost of an item and because minimum payments are so small (usually just 2 percent) relative to the balance owed and the interest is so high, a credit card can take years to eliminate, even if the cardholder never uses them again.
Don’t Cut Them Up!
One common word of advice from financial “experts” is to take a cold turkey approach. Cut up all of your credit cards, close your accounts, and never use them again, these individuals say. With credit cards out of your life, you will avoid interest payments, eliminate temptation, etc. And by running your household on a cash only basis, your pathway to prosperity will be clearer and easier to follow.
At Money Saving Parent, we discourage taking such drastic measures for many good reasons. Credit cards can present potential problems, but the key is the word “potential.” A credit card is only as bad as its cardholder allows it to be. If the urge to charge is kept in check, there is no reason that a credit card cannot be an asset to your household.
Further, credit cards offer temporary relief during a time of crisis. If an emergency arises and cash is tight, a credit card represents a quick and easy solution. Without a credit card, there may be no place left to turn if household cash is limited. You may find yourself forced to turn to family members for a loan or forced to ask your payroll department at work for a cash advance. With a credit card, your problem is solved and you can pay the balance later. A major credit card is often necessary to complete certain transactions, too, and the lack of a credit card can limit one’s ability to rent cars, check in to hotels, etc.
Credit Card Do’s and Don’ts
Credit cards can present a problem, but they also have important uses. Let’s summarize the good and bad points of credit card ownership:
- Do carry at least one or two major (Visa, MasterCard, American Express) credit cards but no more. Too many can tempt cardholders to engage in impulse buying and wrack up debt.
- Do pay more than the minimum balance each month. If all you make is the minimum payment, the interest charges over the term of the debt will more than double your total outlay of cash. You will end up paying double or more for what you purchased.
- Do keep credit limits under control. If you can’t handle the temptation of having a credit card with a $10,000 limit in your purse or pocket, then request a smaller limit- one that is enough to cover emergencies and no more.
- Don’t use a credit card for purchasing luxury items or luxury travel. If you don’t have the money to pay cash for your new bedroom suite or dream cruise, save until you do.
- Don’t carry a balance on store credit cards, since they usually have the highest levels of interest. Buy what you need, then pay the balance in full.
- Don’t obtain a major credit card with annual fees UNLESS the fee can be justified. An example is a credit card that earns frequent flyer miles. If you fly quite often, the flight rewards could make the annual fee worthwhile
Credit cards are useful and they can come in very handy when cash is short and emergencies arise. Don’t listen to those who recommend cutting up your credit cards- there is no reason to take such drastic measures. Credit cards can be your friend and ally. Just exercise good judgment, show restraint, and use your credit cards sparingly. Follow these simple words of advice and you will be well on your way to financial independence.
Other entries in this series:
Copyright 2014, Bryan Carey