I began thinking about credit cards differently when I was 18 years old and my grandpa said to me “using a credit card is like taking out a mortgage on your clothes.” And now, a short 10 years later, I can proudly say that I’ve never had a credit card (and I never will).
You know yourself. If you’re a saver and don’t have a problem managing your money and paying off your credit cards, then more power to you. I am not like you, and I need to stay away from credit cards for the following reasons.
1. I am a spender
I am a spender and I will spend money that I don’t have if I can. I like nice things, especially clothes. I know myself, and I am acutely aware of my desire to spend. By using cash or my debit card (as credit) I avoid all the temptation that comes with credit cards.
Credit cards encourage overspending because they give you access to more capital than you actually have. If you’re a spender (you know who you are), then consider cutting ties with your credit card.
2. I am committed to becoming debt free
I want to be debt free SOOOO bad. On one of his episodes, Dave Ramsey said, “if debt is an option, you’ll always be in debt”. Meaning, the more you think that debt is available to you, the more likely you’ll be to put yourself in debt (because we act based on our feelings and wants more than reason). I truly believe this, so I choose not to allow credit cards to be an option. I don’t want debt to be an option for me. Instead, I use an emergency fund for unexpected expenses, not credit.
3. Rewards aren’t worth it to me
For me, the rewards aren’t worth the temptation. I think that if a credit card company can suck you in because of their rewards, you’re really at their mercy (not to mention they can change these rewards at any time). I want the control, not the company. I know I’m giving up some perks but being debt free is more important. No one ever became rich from credit card rewards.
4. Old habits die hard
Once you’re in debt, it’s hard to get out of debt. I know this from my student loan debt. I have enough student loan debt for a lifetime — I don’t need anymore. I don’t ever want to do this again. And while my student debt is arguably worth it (maybe?), I could never justify consumer debt.
5. Compound interest
I love the Einstein quote: “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
Compound interest is interest calculated based on the previous period’s principal and interest over time. The idea is that your money grows exponentially over time. Just like compound interest can benefit you if you’re investing, it can also hurt you if you use a credit card and carry a balance.
This means that if you invest your money, you will earn interest on it and overtime, the effect of compound interest means you’ll potentionally make a lot of money. BUT if you use a credit card and carry a balance over to the next month, you’ll have the same experience as the investor, except instead of earning it, you’ll pay it. No thank you.
6. My debit card is protected as much as a credit card
Some people say that using your debit card is risky. However, if you use your debit card as credit, it’s just as risk as using a credit card. If you use “credit” instead of “debit” when you swipe your debit card, the merchant charges your card as if it were a credit card, which then gives you all the protections that are given to credit card users. For example, my debit card is a Visa. If I use my debit card at the grocery store and choose credit, I’m afforded all the protections that all Visa credit card users are afforded. If I swipe it as debit, I only get the protections that my local bank offers. So, I use my debit card and choose “credit” for purchases.
There’s inherent risk in using all types of cards, but there’s no more risk in using my debit card as credit than any credit card.
7. Credit cards can damage your credit score
If you get into credit card debt, you can damage your credit score – fast. One mistake or two, and your credit score is in big trouble. I don’t want to tempt myself with the available credit and end up hurting my credit score. Why add extra ways for your credit score to go down? That’s my thinking, anyways.
“But I pay off my credit card monthly.” To that I say: I hope you always do! For me, it’s too tempting and not worth the risk. And looking at the numbers, it’s clearly too tempting for a lot of people.
9. The stats show it all
Here are a few credit card stats that show why you may want to avoid credit cards.
Average credit card debt in the U.S.: As of April 2014, the average American household has $15,191 in credit card debt. Even accounting for the swing in very indebted households, the average household owes $7,087 in credit card debt.
Source: Nerd Wallet
Likelihood of paying off debt monthly: 45% of people payoff their credit cards monthly. Meaning, 55% of American people carry a credit card balance from month to month.
Source: Bankers Anonymous and CreditCards.com
Likelihood of overspending: According to a Dunn & Bradstreet study, people spend 12-18% more when using credit cards than when using cash. This alone beats any rewards program. And since credit card companies aren’t paying me 12-18% in cash to use their card, it’s not worth it for me.
Here’s a post about 4 credit traps you should always avoid, which also goes along with this topic.
photo by sixninepixels via freedigitalphotos.net