Much has been written about the deceiving practices of credit card issuers and our government’s newfound desire to closely regulate them. make it harder for them to continue. In my opinion, some banks and bankers (like some politicians) are bad, greedy, and in need of some adult supervision. Most, however, play reasonably fairly, especially when considering the risks they take in voluntarily lending money to people they barely know.
So rather than focus on the periodic mischievous practices of the banks, let’s discuss the top five lies we tell ourselves about credit cards which are far more dangerous to our long-term financial health. After all, we can’t count on the government to protect us against thoughts in our heads, can we?
Top 5 Lies We Tell Ourselves About Using Credit Card Usage
Lie # 1. I can afford the big screen television/cruise vacation/lifetime supply of organic milk, just not now.
If you can’t afford the purchase right now without financing with your credit card, you can’t afford it. Period. While this doesn’t necessarily apply to big ticket items like a car and a house which will have unquestionable value a month from now, the logic holds for virtually everything else. Some people convince themselves that a credit card is a tool allowing themselves to re-define what it is they can afford. As such, they buy things that they honestly believe they can afford before they actually have the cash for the purchase. But it’s a big lie: if they could afford it, they’d have the cash to pay for it.
Lie # 2: I have a great rate – like 0% APR – so I’d be a fool not to use the card.
Wrong again, smart guy. There’s a reason why banks give you such generous rates and it’s called profit. Sure, they forgo some of the profit in the beginning while you rack up charges during your “teaser” period. But, after the teaser period expires and your rate goes up to some astronomical level, they make it all back and then some. Remember, same as cash is not the same as paying with cash.
Lie # 3: The reward points totally make it worth it.
After a few months you might, indeed, have enough points for a free airline ticket. Furthermore, after several hours on fourteen different web sites navigating dozens of blackout rules might actually leave you with a mid-December red-eye trip to Des Moines. But how much in interest charges, annual fees, and other miscellaneous expenses will you pay along the way? I’ll give you a hint: it’s almost never a free ticket. (That tee shirt you got when you signed up wasn’t really free either by the same logic, now was it?)
Lie # 4: I need to use my credit card and pay interest in order to build up my credit history.
While it is true that your responsible use of a credit card can improve your credit score, it’s also true that irresponsible use of a credit card can ruin your credit score. Furthermore, it is not true that you must carry a balance in order for the credit card to build your credit history. (I had several people in multiple cities last year tell me that was one of the reasons that they were carrying a balance. I don’t know the source of the rumor, but trust me, it’s total nonsense. In fact, whether you pay your full balance every month or simply make the minimum payment, as long as your payment is on time, you’re building up credit).
Lie # 5: Since I pay my balance every month, there’s nothing wrong with using credit cards for everyday purchases.
This statement is almost universally accepted. (I’ll admit I believed it for many years.) But it, too, is not true. Saving strategy number one is to stay emotionally connected to your money. When you spend cash, it hurts – right away. When you spend with a credit card, there’s no pain (at least not until you get the bill). The separation in time a credit card allows between when you make the spending decision and when you feel the pain allows you to spend more. Furthermore, the convenience of using a credit card allows you to spend more often. Taken together, the use of a credit card means you spend more money and you spend more often. That’s what it’s a lie to think that by simply paying off your credit card every month, your credit cards won’t affect your finances. Doubt me? Leave the cards at home for a week and see how much less you spend. The results just may scare you.
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What do you think? What other lies do we tell ourselves regarding credit card usage?
Tags: credit card, credit card lies, credit cards, minimum payment, reward point
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Great post and I think you hit all the reasons right on the head. The best thing credit cards buy is denial.
I still disagree with number 5. I use my CC for everything, but I pay it off once a week online. There is no “waiting for the bill” — by the time the bill comes I’ve paid it off weeks ago. Actually I don’t even get a statement because it is electronically delivered and by the time I get it in my email, I’ve already seen it online since I check my account daily.
Basically it is a credit card that I treat like a debit card — transactions are entered into my checkbook immediately, so the emotional connection to spending is still there. I just don’t like debit cards, because they are more risky, especially online.
I may be an extreme case, but there are other examples as well. Recurring bills like phone, internet, cable etc. can be set up to be paid by CC and then paid off online. This way you get the cash back rewards, and you don’t spend any more than usual because these bills are typically fixed.
This is a great post. We pay our cards off every month, but I am certain we spend quite a bit more because of the credit card. Frankly just the hassle factor of getting cash out or writing checks for things would be a deterrent to me. A debit card would not be much better for us, except we would pay a little more attention to make sure we did not overdraft.
@Fiamma: Thanks for the comment and I love the one-liner!
@Finance Nerd: I’d argue you’re either in denial or, as you say, an extreme case. For what it’s worth, I use credit cards myself and would like to believe it doesn’t affect my spending. Yet when I spend cash different spending decisions are made. Consider leaving them at home for a day or two and let me know what you think. Can’t hurt.
@Tom: Thanks for the kind words and for sharing your approach.
I’ve found that time and again, I spend more prolifically with cash than I do with credit cards. With cash, once it’s spent, the emotional connection is gone. With credit cards, I have to see it show up in my Yodlee transactions, see the balance adding up on the card throughout the month, AND take a big chunk out of my expense account when I pay it at the end of the statement period. There are at least three checkpoints at which I’m reminded to keep the spending down, to pass on certain purchases because I’ve already spent X amount on myself this month, and/or to go return items that shouldn’t have been bought.
This is all before I enter my receipts by hand into a pen/paper ledger to track my weekly expenses, so if I skip this last step as I often do when life gets too busy, I’m still needled by, and in pain from, the electronic reminders.
There are ways for CC to help keep spending down, but this works because it’s a consciously developed system with multiple barriers in place that prevent me from doing the more common out-of-sight, out-of-mind accounting that prevails with CC use.
You just need to know yourself well enough to recognize if and when you are lying to yourself about your financial habits, and how to adjust your system to accommodate.
I use a debit card for a lot of my daily purchases, and having to log those receipts in checkbook ledger and then into the budget spreadsheet keeps that connection “live”.
I have tried the ‘cash envelope’ system, and it also works well. But looking back at my records, I don’t see a difference in spending patterns. What DOESN’T work is just loose cash in the wallet – if I have cash in my wallet, it just melts away.
Common theme: By knowing oneself and what makes it easier for you to spend, you can reduce your personal temptation to make a mistake.
In our house cash is like shooting ourselves in the foot – if its in our pocket its spent. Maintaining our budget so much easier with a credit card, too. I can download all of our activity right to MSMoney – do analysis, etc. If we pay cash i have to guess the catagories or keep receipts or keep a little notebook – not happening at our house.
Michael,
Great post, and it makes me think a little deeper about credit cards — like back to a time when there weren’t any and cash was the only option. That was just 30 years ago. My father raised me to understand that cash is king, even though I grudgingly have two cards to “build up credit to get a mortgage” (something most people in our generation will never have enough cash for upfront). If anything, what’s happened in the financial markets recently should encourage us to question the common dogma (aka “lies”) about how to best manage our money. Glad you’re here helping us with that.
if you are eager to acquire your first credit card it is essential that you choose a better credit card company. much better that you do comparison from those credit offers. You have to consider the interest rate, credit limit, the benefits and rewards you can get from a particular bank. If you already have obtained a credit card, you should learn how to manage your finance wisely to avoid debt problems and bad credit.
ya its good to keep adult supervision if any risk or something. the risks they take in voluntarily lending money to people they barely know.
@philipsmith