Credit cards can make our lives safer and easier by allowing us to make purchases without carrying large amounts of cash. Credit card debt, however, can make our lives miserable. Understanding the risks can help you manage this debt better.
Credit cards are wonderful. A credit card can save your life. Without having to carry money, you enable yourself to buy something — almost anything — in the very moment you need it. If that thing happens to be an ambulance ride, it could literally save your life. But, the debt that accumulates as a result of credit card purchases can weigh you down like an anchor.
Because credit cards are so easy to get and easy to use, they seem harmless — even helpful. Many people use cards seasonally for vacation or holiday shopping and manage each year to pay off the seasonal debt before the next year rolls around (though saving those few thousand dollars in advance instead of using a card would eliminate hundreds of dollars wasted on interest each year). Others fare worse.
Many people are unable to stop using a credit card even when their ability to repay is maxed out. That's when the debt begins to mount.
Credit cards are designed to be flexible. They feature low minimum payments that in some cases barely cover the interest charges. The result can be a $10,000 credit card balance that can take decades to repay.
As a result, the card's flexibility becomes part of the problem
Most credit cards also feature relatively high interest rates. If your card has a grace period, you’ll likely be paying more than 12 percent annual interest (if you have good credit). If your credit is marginal, you could easily be paying above 20 percent. If you make late payments, you could be paying more than 24 percent interest. Compare that to a mortgage or a car loan at around four percent.
Credit card interest, unlike mortgage interest is not tax deductible. This makes it effectively more expensive.
If you allow your credit card issuer(s) to tell you when you can stop spending by bumping up against your limit, you may be able to control your spending, but at a high cost. If you could instead control your spending at the level your income supports, with no credit card debt — that is, if you didn’t have the credit card loans on which you’re paying that interest — you’d have much more money to spend.
For instance, if your credit card limit is $10,000 and you keep your balance near that level, without paying it off each month, you could be paying about $200 each month for interest. That adds up to $2,400 per year. That’s a lot of wasted money. Would that fund a nice vacation for your family? How about a nice Christmas?
Even when you’re in control, credit card debt may be taxing you painfully. If you’re out of control, you’re constantly applying for new cards, asking to have your limits raised and otherwise adding to your credit card balances every single month, you may be headed for a financial cliff without realizing it. One day, there will be no more credit available and you may go right off the edge.
Credit cards are wonderful devices that facilitate safe spending. Having a source of emergency credit makes sense and is part of prudent family living. But borrowing on credit cards isn’t the best way to pay for seasonal expenses. Savings is.
Borrowing just a little bit more every month is painful, slow financial suicide
Step away from the cliff. Get control of your credit card debt before it gets control of you.
Devin Thorpe, husband, father, author of Your Mark On The World and a popular guest speaker, is a Forbes Contributor. Building on a twenty-five year career in finance and entrepreneurship that included $500 million in completed transactions, he now champions social good full time, seeking to help others succeed in their efforts to make the world a better place.