Credit cards are for transactions; not to borrow money
In a recent post about credit card interest rates, Philip Brewer at Wise Bread explained:
I use credit cards for transactions, not to borrow money.
One of the smartest things you can do for your financial health is to pay off the total balance each month on your credit card. Whenever we use a credit card, we’re borrowing money. Interest gets added to the balance if we don’t pay off the total amount we owe each month.
The big money-maker for credit card companies is consumer interest. They want us to carry a balance. But they don’t make us. A lot of people just do. Why?
Please don’t say it has to do with how much money one makes. At the age of twenty-two, I never carried a balance; nor do I now at forty-two. Just because I have an available credit limit doesn’t mean it’s my money to spend.
What makes some people get this concept and others don’t? Behavior and money’¦ sometimes it just doesn’t make sense to me.
Photo credit: stock.xchng.
Probably because people use credit cards for purchases they need that they cannot afford to pay by the end of the month, like car repairs, home repairs, large appliance replacement, etc.
Unless you are lucky enough to be able to have a savings for unexpected emergencies, then sometimes your credit cards are your only option.
Obviously everyone’s finances aren’t as healthy as yours.
I’m always shocked when I hear that the average American has $8000 in credit card debt or whatever the current statistic happens to be. We pay our bill monthly (actually more often than that), my brother’s family = same, my sister’s family = same, our best friends = same, our other friends = same, my father = same. I can’t think of any one in our social circle who carries a balance so I always wonder who does.
I think it’s missing the point to express your good credit practices in this way. This country is full of people who view credit cards as free money, there for them when their bank account runs dry. They see them as a way to stock up on all the luxury items they want and that this uberconsumer society convinces them that they need. And it’s not limited to credit cards – people do this with home equity loans too, putting at risk the very roofs over their heads.
It’s great that you have such a clear understanding of what credit cards really mean, and the danger of credit used indiscriminately, but you are in a clear minority. It’s not just a matter of people not “getting it,” it’s that overspending is a sickness. It is de rigeur for people to live beyond their means, as evidenced all the credit problems in the US today. But now credit has dried up, and the people who overspent are facing HUGE interest bills. (In this ultra low rate environment, credit card companies have jacked their rates up to 15-30% to account for the lost revenue they would have seen from new accounts or limit increases. Despicable!)
So these consumers are probably starting to see that credit isn’t free, now that the consumer cycle is broken and cash reigns again. I’d love to see more consumer credit education, programs to help those who have gotten in over their heads, and more limits placed on the credit companies.
Nina,
I think that people look at credit cards as free money, not as a loan. It’s easy to start out with good habits and then let your balance carry over one time and then just get into bad habits by letting that balance keep carrying over.
I think, like most issues, that this is not “black & white”.
If I remember the studies correctly, actually the MAJORITY of people do not pay interest on credit cards. Either they don’t utilize credit cards at all, or they pay off the balance in full. You are not, therefore, in the minority.
One statistic that confuses people is the average credit balance number. When I pay my credit card, I actually pay MORE than the last bill,sometimes the entire current balance. So, to explain that, if my bill was $900, but by the time I pay the bill (about 2 weeks later), the current balance is $2100, I would pay $2000 (or some other round number). About a week later, my CC co reports my balance to the credit reporting companies. By that time, the balance may be $500. That’s the amount reported – and, hey, I am now part of the statistic for “average credit card balance”. Obviously, I do not actually carry a “balance”, nor have I ever paid interest, but it looks like I do.
I very much doubt anyone, except perhaps the most poorly parented young people think credit cards are “free money” (and they figure out rather quickly that they are wrong). I also think that it’s likely that only a small percent of those who use credit unwisely are totally irresponsible.
Instead, people who pay interest probably fall into several broad categories.
(1) Those with regular money flow problems. My parents fell into that category. Even though some people would lead you to think that no one had credit in the past, this is simply not true. My parents had credit cards, but the states kept the interest reasonable (usury laws – look it up). Frequently my father was “laid off” (which didn’t mean “fired” then either, it meant a temporary work stoppage, but you kept your job). During those times, our income was much lower, and since they did not have luxuries to cut, they would run up some debt, and slowly pay it back down when work started again.
(2) People who have one huge expense that sets them back for a long time. Like say a divorce where their spouse cleans out the bank account. Or a sick child (which not only cost money, but often reduces family income due to care). These are often people who may have a small emergency fund, but again live close to the edge without a lot of “discretionary” spending in their regular budget to cut.
(3) People who just believe having a credit card balance is normal – like most people feel about a car payment (something we don’t have) or a mortgage payment (one we do have, unfortunately). They may not be very good at math, and figure that that’s just how the system works. For example, a coworker of my husband (who based on his job has to have a healthy income) was listening to us talking about budgeting, and he, rather puzzled, asked my husband “so, when you want to buy something, you SAVE up the money first?”
Annie G: That’s a great comment and you’re right about the broad categories. I seem to know a lot of people in the third category who believe that carrying a balance is normal. Perhaps it has something to do with geography, cost of living and how the things being purchased are viewed as needs vs. wants. I know people in Southern California that live beyond their means and do so, by carrying large credit card balances. It’s not a sustainable way to live and much like you’re husband’s coworker, I’m always surprised that they’re comfortable with this kind of debt.
Debra: The columnist, Liz Pulliam Weston, has written a few times about these statistics to show that we’re not all hooked on credit card debt and struggling. That said, I know three people (different ages and varying circumstances) that all carry more than $50,000 on their credit cards. I’m just blown away that they can live this way.