Credit cards are an important part of learning money discipline. They also offer convenience and help you build your credit score, which in the long run can save you thousands of dollars in lower interest rates.
I’ve used credit cards three different ways throughout my life:
When I was in college I used them to buy furniture for my first apartment. With over $1,000 in credit card debt, it made me feel uncomfortable. I saved every penny I could from my paychecks and paid it off in full after just a few months.
Years later, when facing difficult financial times, I used credit card checks to fund my checking account. Luckily, I was able to get back on my feet and paid off the entire amount within a year.
Now, I use credit cards to pay monthly expenses but pay them off in full each month. I use them for convenience (many online transactions) and for the value of the reward points (have gotten several thousand dollars worth of Home Depot gift cards).
However, I was lucky. I have seen many people fall into the credit card trap, where they get so comfortable with credit card debt that they spend their whole life living months behind their actual income. This is how credit cards change your life! The comfort with debt and living from behind becomes so everyday that many people let it carry over into other aspects of their life. This may explain why so many home buyers during the 2000’s took out adjustable rate mortgages, and borrowed for homes that were 2-3 times more than they could afford.
Not only is living from behind risky. It’s expensive. Credit card rates can be low, but most chronic credit card consumers don’t even pay attention. Currently rates are in the teens. By carrying balances on these cards, not only are you not saving, but you are spending over 10% on your balances, which means that you’re monthly payments are barely reducing your debt.
I’ve seen many friends get into this credit card trap and many don’t even begin saving until so late in life that it is always going to be difficult to retire. If only, instead of living from behind, they would make some serious budget changes and get out of debt, their lives would change. They would not have that burden of debt and they could feel positive reinforcement in their motivation to save and invest.
The takeaway: Credit cards must be used with restraint!