As mentioned in my introductory post, there are “5 Steps to Get Out of Financial Purgatory“. We’re going to focus on each individual step in this blog series, so you can understand how and why each is important, and maybe use some of the information to make changes in your own financial life.
Step one is to destroy those credit cards, and I stand by that (unless you are actually paying down your balance to zero every month – in which case, you’re exempt). I have been living without a single credit card for quite a few years now. I shredded all of them the same day I decided it wasn’t worth it, and although I cringed as I was doing it, I honestly wish I had done it sooner. Those credit card debts were settled for less than the original balance as soon as we had saved up for it.
I realize, to most of you, the idea of shredding your credit cards sounds extreme, but isn’t it more extreme to put a vacation, groceries, gifts, or bills on credit? To rely on something that will only cost you more in the long run? Not only is more debt accruing by way of interest, but aren’t you also just justifying living outside of your financial means?
Living a Life You can Afford
The reality is that credit cards allow you to say “yes” to purchases you should otherwise be saying “no” to. Living within your means can be difficult at times, and I understand the habit of reaching for your card to make things better, but that desperation to satisfy your own wants, or even the wants and needs of someone else, is no excuse for breaking this basic rule. Remember the Marshmallow experiment of the 1960s? Instant gratification has become so habitual, that it has affected our ability to be patient and save.
“Certainly, our march from one level of gratification to the next has imposed huge costs—most recently in a credit binge that nearly sank the global economy.”
– Paul Roberts, The American Scholar
Living a life without credit cards is not as difficult as you may think. They’re not must-haves or requirements for adulthood. You don’t even need them to build credit (contrary to popular belief). Without a credit card, you’re less likely to impulse shop, overspend, or go on an expensive vacation, because when you’re acutely aware of the amount of money you have in your wallet, your spending habits naturally decrease. It’s a psychological phenomenon —> “Research shows there’s pain in paying with cash.”
Hypothetically, if you pay $250 for a used bike for your 12 year old using cash or your debit card, the final cost is $250. You traded your money for a product that you wanted.
If you pay $250 to buy that same bike with your credit card instead, it will obviously cost you more. If you carry the balance, or just make the minimum monthly payments, you will be incurring 15% (or more) in interest. And, if we’re being honest here, your kid will probably outgrow the bike, and you’ll sell it at a garage sale for less than half the original price before you even get it paid off.
In comparison, wouldn’t it have been smarter to take the “discount” and get your instant gratification in the cash purchase? After all, I hear cash is still king (shocking, I know).
The Many Arguments for Credit Cards
- Security. Carrying around large sums of cash offers no protection, but debit cards have come a long way in regards to security. Credit cards still offer marginally better fraud protection than debit cards, BUT if this is still a concern for you, consider one of the following: 1) set aside some cash in a separate account specifically for your debit card use, thus limiting the damage if some jackass hacker breaches your account 2) if your bank offers it, have photo ID added directly on your debit card for added security 3) or get a Paypal account and use their debit card for purchases – you can use it as a credit card or debit and either way, it has full fraud protection against unauthorized use.
- Uh, security. This time, I’m referring to the security you feel having the credit card in your pocket as a lifeline. Just in case you want or need something you can’t afford. Just in case you’ve spent more than you earned. Just in case an unexpected event happens. “Just in case” is NOT a good strategy. It’s a disaster waiting to happen. Start an emergency fund instead – it’s cheaper. A great place to start is about 3 months’ worth of income.
- Rewards. Oh, yes, the coveted credit card rewards! According to Megan Elliott of the CheatSheet, “Just 63% of card users surveyed by J.D. Power in 2014 said they completely understood how to earn rewards, 43% don’t know if there’s a maximum limit on their rewards, and 30% aren’t sure if or when rewards they’ve already earned expire.” The bottom line is this: if you can afford the minimum spending limits, stay organized enough to effectively collect and use the offers, AND you’re disciplined enough to pay off the the credit card monthly, then be my guest. If not, then it’s probably not worth it.
- Status. This, by no means, applies to everyone, but it’s worth mentioning. Some credit cards are created in levels, making the top one appear “elite”, and may even come with more rewards or privileges. The truth is, the banks just want you to have more credit to “spend”, so they can make more off of you in the future. Carrying around a gold or black card doesn’t make you special, and in many cases, just gives you more debt, something shiny to show your friends, and a bigger ego.
- Convenience. You can put just about anything on a credit card. It’s so convenient to use for your car and hotel reservations. It’s so simple to use at the grocery store, or use on Amazon for Christmas shopping. Clothes for the kids? New furniture? Family vacation? Swipe. Swipe. Swipe. Alternative: Save up and use your debit card. Added bonus: Chances are you’ll make more responsible choices on WHAT you spend your money on when you have to actually save for it.
The average American household has an average outstanding credit card balance of $15,609.
There are those that pay down their cards each month, and are responsible in the way they use credit. If you are one of those people, then my kudos to you. But for the rest of us, change is in desperate need. Even those of you who are making your minimum payments every month may be in trouble. You just don’t know it yet.
Your perspective, needs, and lifestyle may be worlds away from mine, but you are here for a reason. Things might be stagnant (can’t save), getting tight and starting to fall behind, possibly unmanageable, or maybe it’s tough to figure in the cost of your future. So, maybe, just maybe, your perspective needs a reboot and your home needs a money jar.