For many years, I used credit cards like they were cash. When I wanted to make a purchase and didn’t have the money in my pocket, out came my credit card and suddenly I was the proud owner of something that I probably didn’t really need or could have paid for with a check. For me, the convenience of being able to use a credit card at any store was hard to resist. These were the days before debit cards and consumers didn’t have any payment options but cash, check, or credit card.
Now you can use a credit card just about anyplace and for just about any product or service. The cards can be used to order items online or over the phone. Credit cards can even be used to pay for income and property taxes. You can use your credit card to receive a cash advance, and many credit card companies send you blank checks that you can use to write against your credit card account. Let’s face it, credit cards are downright convenient… especially when you don’t have the money in your checking account or cash in your pocket.
What I overlooked is that a credit card is much more than a magic piece of plastic. It is a financial tool that gives you access to a line of credit. That’s right, a line of credit. Every time you swipe a credit card, you are taking out a loan with your credit card provider. Just like any other loan, you are expected to pay the credit card loan back on time. If you carry a balance over from month to month, you can expect interest…lots of interest. You can also expect fees. You will find there are fees for paying late, fees for cash advances and for using those convenience checks (3-4% and a higher interest rate). Want to transfer a balance from one credit card to another? There is probably a 3% fee on the balance transfer as well.
If used correctly, a credit card can be convenient and rewarding. You can build and maintain a good credit score using a credit card. You can earn points for vacations and cool gadgets. Some credit cards even offer cash back on purchases you make with the card.
On the other hand, the money you spent on that convenience and all of those vacations, toys, and other perks are going to bite you hard if you abuse your credit cards. How can you misuse your credit cards? You also misuse them by using them to live beyond your means, by failing to pay off your balances, or by only making minimum payments. The worst way you misuse a credit card is to not make your payments on time. If you don’t manage your credit cards well, late fees and interest rates will go up as fast as your credit score goes down.
As with any tool, credit cards are not inherently bad. It’s how I misused my credit card that led me into trouble. When contemplating using a credit card, I now ask might ask myself two questions:
- Can I afford to pay for this when the bill comes due?
- Does this purchase fit into my overall spending plan?
Now, if the answer is no to either question, I think twice before using my credit card.
These are questions that I have learned to ask myself. Like many Americans, I had to learn the hard way not to let convenience overwhelm my judgement. Now, I challenge you to ask the same questions every time you are thinking of using your credit card.