When it comes to budgeting and being mindful of money, credit cards can have a huge impact on the bottom line. Many places don’t take checks any more and sometimes people look at you like you are crazy when you slow down the line by paying cash. I can hear them thinking “aw she is cute paying with her little pieces of paper.” Credit cards make paying for things simple and fast, but they can make us less aware (mindful) of our spending habits. Let’s take a look at some of the pitfalls and some benefits of credit cards.
Every day we are bombarded with credit card adds that talk up the benefits of their points programs. If you use their card you will get cash back, airline points, hotel points, or member exclusive access to certain events. This all sounds wonderful but what are these benefits really costing you.
One popular program offers you 1.5% cash back on every purchase. Sounds great, free money! Maybe, maybe not. The company is counting on you not paying off the credit card every month so they can charge you interest, which is much higher than 1.5%, that is pennies to them. I have seen interest rate ranging from 6% for people with the best credit scores, 14% on average, and up to 25%. If you carry a modest balance the cash back still does not put a dent on the low end 6% rate.
One common mistake people are tricked into, especially with advertising, is putting things on their card just to earn rewards. Sure, you might earn a free plane ticket here and there but if you are paying interest on that purchase that “free” ticket is costing you more than if you just purchased the ticket outright. If you are making a purchase just for the reward, maybe think twice…can you pay the balance before the next billing cycle. If the answer is no, ask yourself, would I make this purchase if no reward was involved?
I fully confess, I love my points programs. Particularly the program tied to the card I use for business travel. I know that when I put my hotel, car, plane ticket, and any other business costs on the card I will be reimbursed for those charges before the next payment cycle. Therefore, I do get free money.
Carrying a Balance
There are times when an unexpected expense comes up or we just need to make a large purchase. It is great to have a credit card to facilitate the process. Another reason a credit card is great is for online shopping. There are some great deals to be found or products you just can find locally but you need some form of digital payment. Many of the sites I use let me save my payment and all I have to do is click a button and my purchase is on its way. These are all reasons credit is great.
The danger is in carrying a balance. A few years ago, I was helping someone with a budget and they had maxed out their American Express card; these cards are not meant to carry a balance. He was being charged 25% interest on a balance that was over 20k. Think about the math on that for a minute. That is $5,000 interest in one month. Each month that number grows and it becomes more difficult to get out of that hole.
But let’s take a more common example. Pretend you carry a $2,000 balance at the lower end of the interest scale, say 10%. This will cost you $200 interest; the minimum payment is 50.00. If you pay just the minimum next month you owe $2,150 with interest of $215. And so it goes until you buckle down and pay the balance off.
I get it, sometimes the unexpected happens and you have to use your card, but I suggest you pay the balance as quick as you can.
Not Paying off Everyday Items
I put a lot of stuff on my card, from gas, groceries, cell phone bill, gym fees, to lunch when I don’t feel like packing my own. It is just easier to have all the charges go to one place and then I pay the balance every payday. This just simplifies my life, especially when I am on the go a lot. The biggest trap I see people fall into not paying off the everyday purchases.
Even if you have to carry a balance for a large purchase, my advice is to make sure you keep track of the ordinary purchases and make sure you pay them off each month. This way the sneaky interest monster does not grab you and put a dent in your financial goals.
Speaking of everyday items and online shopping, when I lived overseas, I met a lot of people who did not have any credit cards. Where I lived, they were not that common and many local businesses did not accept cards. A friend of mine asked where I purchased the book I was reading; I told her Amazon. She was sad that she could not get the book. At first, I misunderstood and thought she meant they will not deliver to our location, so I quickly told her “no Amazon does deliver here.” The lady corrected me, she said “I do not have a credit card so I have no way to pay for this item.” Being an American from a consumer/credit culture this was new to me. Long story short, I bought the book for her and she just gave me cash.
As Americans, we do live in a credit culture, which can be a good and a bad thing. Having a credit card makes it so we have access to many things at the click of a button. The pitfall is that it is easy to spend beyond our means and the things we buy end up costing way more than we think. As always, there is no judgement, I am just advocating for mindful spending.