You’ve probably heard all the reasons why credit cards are good, so allow me to tell you why they’re not. Here are eight reasons why credit cards are bad news.
1. Interest rates are high
When you saw this one, you probably thought, “Oh, this doesn’t apply to me. I pay my credit cards off every month, so I never pay interest. I’m good.” Well, that’s still a bad reason to use credit cards (I’ll explain why later), but for now let’s talk interest.
It’s no surprise that the interest rates on credit cards are outrageous. Sure, sometimes you can get interest free offers (especially if it’s a new card or something), but what happens after that . . . when the offer expires? Yeah, rates go up, and they average around 20 percent. That’s ridiculous.
2. You spend more
Studies continue to show that people spend more when they use credit cards, and this makes sense for a few reasons, I think.
First, when you’re using someone else’s money, it’s easy to get carried away spending. I mean, you really have no “skin in the game” like you do when you use your own hard-earned money.
Another reason I think this happens is because of the “cash back” rewards that a lot of people talk about (which is a joke, by the way). But I think it causes people to careless swipe, thinking they will get cash back anyway.
Also, when you put off paying for things (like you do when you use credit cards), you don’t look for cheaper options at the time of purchase, you don’t look for sales; you simply pay whatever the register tells you to pay. When you use cash, however, you only buy what your cash says you can buy. When you are at checkout and the amount exceeds the money you have, you simply can’t get it; you have to put something back usually.
3. Cash back is wack
One of the biggest jokes about credit cards is the “cash back” feature. Think about it this way: when you get 2 percent back, does it really do anything for you since you probably overspent using a credit card anyway?
For example, if people spend 10 percent more when they use credit cards, they are still 8 percent in the hole once they get their 2 percent back. That’s like giving me 10 dollars, so you can get 2 dollars (not a good plan). Credit card companies know this, and that’s why they offer it.
Another interesting thing occurred to me about this . . . Say I use a credit card for gas and groceries only to get cash back. If I get 2 percent cash back, that would probably give me about $14 a month. Don’t you think you could just save (or not spend) $14 a month instead? This happens all the time with me.
Maybe I budget $700 a month for gas and groceries, but that doesn’t mean I spend it all each time; they’re are some months I don’t even come close. I can probably save $14 a month (or more) just by being frugal, perhaps not buying something that I didn’t need. The best way to save money is to not spend it! I’m sure I could save a lot more than $14 a month without depending on cash back to do it for me.
Also, there are a lot of banks out there right now that offer cash back on debit cards. Some have points you can earn, too; why not do that instead? At least when you use a debit card, it’s like using cash, and you can still get a kickback for it.
At the end of the day, $14 a month is not going to matter much; it’s not like it’s gonna make you rich. I can find a lot more creative ways to save $14 a month without using a credit card.
Whitney Houston once said, “Crack is wack!” So let me be the first to tell you that, “Cash back is wack!” If the reason you’re using a credit card is to get cash back, then you haven’t got a good reason for using a credit card (I’m a huge Whitney fan, by the way).
4. They complicate your finances
I hear people say all the time that they use credit cards and pay them off every month. They do this to increase their credit score and get cash back, blah, blah, blah. This is another lame excuse to use credit cards.
If you are the rare exception to the rule, who never pays a penny in interest, who always pays their credit cards off each month, and gets cash back for doing it, my only question to you is this: Why do all of that just to complicate your finances?
If that’s you, you are basically paying your bills twice. Not only do you “pay” for your gas and groceries once, you do it again when it comes time to pay your credit card. Why not pay cash one time and be done with it?
5. They’re dangerous
How many people do you know that get into all kinds of trouble using credit cards? Credit cards have destroyed people’s lives, finances, and families. The number one reason people divorce is due to money issues, and I’m sure credit cards don’t help with that.
It’s so easy to get into trouble financially using credit cards. That’s why it happens to so many people.
There are Americans today that are tens of thousands, if not hundreds, of dollars in debt. That’s just sad. There’s no reason for that.
It’s so easy to reach a point where you just can’t pay the bills anymore; you’re bankrupt. This happens all the time. When your outcome (paying off your debt) becomes more than your income, you are bankrupt. Credit cards have been a common cause for this in the lives of so many good-willed people.
6. They keep you in debt
What about the guy who says, “I use credit cards to have a good credit score.” Haven’t we all heard that one!
Yeah, that’s cool, but why do you care about a “good” credit score? For every reason you can think of, I can think of two reasons why it’s not worth caring about. There’s only one thing that helps your credit score, and that’s by getting in debt, staying in debt, and paying your debt on time, all the time. That’s not what I call winning; that’s a trap.
People who win with money, didn’t make a habit of borrowing money or caring about their credit score. Dave Ramsey, who is a multimillionaire, has a credit score that’s zero. He can’t even rent an apartment because his credit score is not “good enough,” but he can write a check and buy the entire complex, probably. Something’s off there.
Do people really care about an arbitrary three digit number that means jack? I guess the answer is yes, most people do. But most people are broke and suck with money. I wouldn’t get financial advice from broke people, though. Why not take the advice from those who are actually wining with money, like almost every millionaire ever.
The fact is that most millionaires didn’t inherit their wealth; they didn’t become rich by borrowing money; they didn’t care about a silly credit score. What they did was avoid debt like the Plague. They lived a modest life of saving and investing; that’s how they built their wealth.
7. They tie up all your income
When you rack up a bunch of credit card debt, you reach a point where all your money is going towards debt. You can never get ahead that way. Not to mention, you’re probably living paycheck to paycheck and wasting money on interest.
If an emergency happens, you have no choice but to fund it through a credit card because you have no real money available (it’s all tied up paying off debt).
This is a viscous cycle that won’t stop until you get serious about getting out of debt and staying out of debt. If you don’t buckle down, you’ll continue living paycheck to paycheck and racking up more and more debt. All of your money will be constantly tied up. This is the case for most people using credit cards.
Your income is your most powerful wealth building asset (as Dave Ramsey puts it), and it can do nothing for you if you tie it all up in payments. Your income is limited; you only make so much, so it’s important you free up as much as you possibly can. Getting out of debt will help you do that. If you want a real chance at building wealth, you have to free up your income. Think about it like this.
Let’s say you work 40 years making $50k a year. If you were to save every penny (which is not possible considering you have to pay to live), you would have saved $2M over those 40 years (that would be awesome if it were possible).
Since it’s not possible, that doesn’t mean it’s impossible to still retire on millions. It is possible, but you have to invest. Here’s how it works.
Say you make $50k a year for 40 years and you’re able to save 15% of it because you avoid debt and live below your means. This would allow you to save $300k over those 40 years, which is not near enough to retire on.
However, if you invested that amount in mutual funds, like 401(k)s and (or) IRAs, you would have over $5M (according to S&P 500 historical returns) over those 40 years. That’s how you do it.
The first scenario is impossible because you cannot save 100% of your income. Even if it were possible, you would only accumulate $2M (assuming you didn’t invest any of it).
The second scenario is not impossible because you are only saving and investing 15% of your income.
You can do this, but you have to be intentional about it. You have to capture as much income as you can. You can’t just save it; you have to invest it. When you do, you will create a situation where you are sitting on millions at retirement.
Avoiding credit card debt is one of the many ways you can free up your income so this can work. It will allow you to save and invest; it will allow you to retire one day. If you tie up all your money in debt, however, chances are you won’t be able to do any of that.
8. You risk your identity
Everything we do generates information: the websites we visit; the things we buy; the passwords we type; everything. Sometimes this information gets into the wrong hands and our identity is compromised.
When you use credit cards, especially online, the chances of this happening to you are a lot greater.
Once upon a time, when I used to use credit cards, I noticed an odd transaction on my account. I caught it early, so it was only pending, but most of us are not that lucky.
I called Capital One immediately to explain the situation, and since I caught it so early, the transaction was not charged to my account for reasons of “identity theft.”
I was glad the transaction was forgiven, but I was still disturbed that my identity was stolen. This can be a pretty serious thing. Using credit cards will increase the risk of it happening.
Avoid credit cards like the Plague. You don’t need them. The truth about credit cards is they’re bad. And the reasons to avoid them greatly outweigh any reasons for using them. Honestly, I can’t think of any good reason to use a credit card because there are so many better reasons not to.
I don’t understand why people play with credit card companies, anyway. Let’s get one thing straight: credit card companies don’t care about you, your family, or your finances; they’re snakes. So why play with snakes? You play with snakes long enough, you’re gonna get bit.