Did you know that we did not always rely on credit cards? In fact, there was a time when being in debt was something to be ashamed of. In the past, being in debt was taboo. There were only a few loan sharks in the country and borrowing from them is usually a scary experience. They charged high interest rates and it was so high that is was actually against the law. Here is a video that will explain the history of how credit became a norm in our society.
In the early 1900s, people found it embarrassing to borrow money. Only the most desperate of them used credit to pay for what they need. Now, it is the exact opposite. The use of credit cards has become so accepted to the point that it is partly used as a sign of affluence. Some people use their credit card to buy things that they believe will make them look rich. Based on what the video narrated, people use credit to buy a big house and fill it with expensive items. In the end, you have a stress-filled home because practically everything in it is not yet paid.
It is this very scenario that should give you the chills when thinking about credit cards. While you may think that it can help you enjoy life, you need to do a double take and ponder on what these cards are really costing you.
3 ways your credit card should scare you
Some financial analysts are saying that the rising credit card debt can be considered good for the economy. One of their arguments is the financial confidence of consumers. When you are confident about your financial position, you feel more capable to pay it back.
While this may be true, there are three important facts about a credit card that you need to realize.
It teaches you to rely on money you do not have.
The most important realization that you need to have is that every time you purchase through your credit cards, you are relying on money that you do not have. Do not be fooled into thinking that you are paying with your own money. The truth is, you are using the money of your creditors. We all know that when you use the money of another, you need to pay it back. When credit cards are involved, you know that it has to be paid with interest. Most of the time, with a high interest.
The use of these cards make you feel like you have more money to spend – even if you do not. What is even more scary is the fact that you are compromising your future finances for the expenses of today.
Think about it this way. You find a glass of water on the table and it is the only water that you have left. You drink it, even if you do not feel thirsty. After spending a hot day outdoors, you come home thirsty. Instead of being able to satisfy your thirst, you find an empty glass on the table. Just when you need the water the most, it is not longer there because you already consumed it.
That is the same scenario that you have when you use your credit cards. Even as you earn money, you can no longer spend it as you wish because you have to pay your billing statements.
It increases the risk of debt.
The second reason why you should be scared of credit cards is because it increases the risk of debt. Your card gives you unlimited spending power – or at least, it goes beyond your actual financial capabilities. When you have that much power to spend, it makes you reckless. It puts you in a position where you will most likely overspend. When you overspend – that can quickly escalate and lead you to debt.
According to the analysis provided by CardHub.com, 2015 started with so much promise when it came to credit card debt. Consumers were able to repay almost $35 billion of their credit card balance during the first quarter. That is quite an achievement right? Unfortunately, that was short-lived. When the second quarter came rolling in, consumers spent up to $32.1 billion worth of credit card expenses. What they paid was almost rendered useless.
As long as you have credit cards and you do not know how to use them wisely, you will always rack up debt that has every potential to ruin your financial life.
It makes you pay more than what you should.
This does not only refer to the high interest rates on credit cards. The thing is, if you can pay your balance in full at the end of every month, you will be spared from paying finance charges. However, that is not the only fee that you need to worry about. According to an article published on USNews.com, the average annual fee for credit cards is currently at $58. This is based on the report from NerdWallet as observed from the 2015 credit card industry.
There are other cards that will charge you other fees like when you are late or you reach your credit limit. It is important to keep this in mind because if you sum it all up, you will always be spending more than what you should if you use your card for purchases.
Reasons why some people do not like paying with credit
Back in 2014, Bankrate conducted a study about the relationship between Millennials and credit cards. The study revealed that 6 out of 10 Millennials (between the ages 18 to 29 years) do not have major credit cards. The article gave a couple of reasons why.
- They are able to get along with it. Thanks to the presence of debit cards, Millennials do not feel that they really need to have a credit card. They can enjoy the cashless convenience and still be using their own cash for purchases.
- They do not like the stress associated with missing a payment. The other reason that we found on the article revealed that young adults are not too keen about the stress that comes with paying bills. They would rather not have the credit card statement coming in because they do not like worrying about missing any payments.
- They got scared after the Great Recession. For a time, this was the primary reason why a lot of people, not just the Millennials, stopped using their credit cards. Consumers realized how this purchasing tool puts them in danger of debt. Although credit card spending has since gone up after the latest economic crash, some Millennials are still hesitating to use a credit card.
- They do not like the idea of credit cards. Some of the young adults refuse to use credit simply because they know that they are not using their own money. While they will pay it back, they realize that they will actually be paying money that is not yet earned.
- They already have existing debts. Another reason why they are hesitant to use credit cards is because of their student loans. Millennials are the most burdened with student loans and it is already forcing them to sacrifice a lot of milestones in their life.
- They do not want to risk falling into more debt. They understand that these cards will put them further in debt and their current financial situation can no longer take in more credit. Their student loans are making them delay marriage, home buying and having children. They do not want to fall into the temptation of impulsive buying habits. That is why they have chosen to put a lid on it by not using credit cards.
While the very nature of these plastic cards are not so favorable, we cannot remove the fact that it is still useful in our society. Apart from the cashless convenience that it brings us, it is also quite important when you are trying to build up your credit history. According to the Bankrate study, some Millennials have admitted that not using a credit card have cost them some money – especially when they tried to buy a car or something similar. This is because not using a card compromised their credit history. It may be true that not using a card will keep you from spending but it could also cost you when you cannot get a low interest loan.
It is admittedly hard to know what is really better for your finances – to use a credit card or not. The bottom line is, you need to understand how credit cards can make or break your finances. Once you have that knowledge, you do not have to be scared to use these cards.