by Damon Carr, For New Pittsburgh Courier
We have all at one time been warned about the pitfalls and dangers of playing with plastic. Our parents would scold us profusely if they saw us doing what we considered were amusing acts such as making masks out of plastic bags. I can still recall my mother’s stern warning—“Don’t play with plastic! Plastic can smother you!” It’s hard to envision something so seemingly innocent as plastic that is primarily used to protect and to preserve food, necessities and other valuables can literally take your life away. We often refer to credit cards as plastic. Like its namesake, figuratively speaking, Don’t play with credit cards! Credit cards can smother you!
I have a son who is in college. Recently, my wife called both he and I into the room. She had just gotten the mail. She held up a piece of mail that came in for my son. The mail was from a large, nationally known retail department store. My wife said the mail looked and felt like a credit card from this retail store. If you’re a regular reader of my column, you can imagine how big my eyes got upon hearing this. I asked him, “did you apply for a credit card?” He said, “Yes, I was shopping and they offered me a discount if I applied for a credit card.”
I responded, “you do realize I’m that guy in the newspaper and all over social media screaming from the top of my lungs about the traps, pitfalls, and dangers of using credit.” I was once asked by a journalist from a London based newspaper, “what should parents teach their children about credit cards?” I stated that parents should put a “Mr. Yuck” sticker on them because credit cards are hazardous to your wealth.
After I calmed down from my initial shock. I figured this could be a teachable moment. I asked him, what do you know about credit cards. He said, “honestly I just applied so that I could get the discount. I don’t know a whole lot about them.” I said in short, this department store is trying to lure you in with a discount in an effort to make you a long-term, loyal customer. They offer you a 10 percent discount then charge you 25 percent interest on the items you purchased if you don’t pay the bill in full, which most people don’t. The average college student graduates from college owing hundreds of thousands of dollars in student loan debt and tens of thousands of dollars in credit card debt. I said your mom and I are making decisions and sacrifices on your behalf so that you don’t end up like the average college student.
There are some reasons various financial pundits justify the use of credit cards. However, the risks tend to outweigh the rewards. Plus, justifying a debt instrument that charges upwards of 18 percent interest is unjustifiable to me. As a result I tend to publicly speak negatively about credit cards.
Its wide acceptance by merchants in the United States and abroad can alleviate the risk associated with carrying large sums of cash. Carrying large sums of cash can subject you to theft and/or loss. If you misplaced, lost or had a wallet full of cash stolen from you, your chances of recovering your money are slim. However, if you misplaced, lost, or had a wallet full of credit cards stolen, you can report the lost cards to your credit card issuer. As long as you follow the correct reporting procedures, you would be liable for a maximum of $50.
In the event of purchasing defective merchandise, as long as you properly follow the correct reporting procedure, you can withhold payment for the defective merchandise until an agreement has been worked out. If you purchase defective merchandise with cash, check, or a debit card it can take months before you’re reimbursed. Some merchants make it harder to rent a car, book a flight and/or reserve a hotel room without a credit card. In most cases a debit card can be used instead of a credit card.
When a credit card is used for shopping sprees, unplanned purchases, emergencies and/or as a supplement to your income, credit cards can wreak havoc on your finances, literally smothering you in a pile of escalating bills and a mountain of debt. This often leads to mental health and marital problems that can accentuate the smothering hold the misuse of plastic inflicts on its user. Credit card companies have been very effective in persuading the general public that by owning credit cards you are a part of a privileged group. People boast and brag about having premium, gold, platinum, and black cards. It’s viewed by many people as a status symbol. In truth having a credit card with no limit only proves one thing —the person with no limit has the ability to go deeper into debt than a person who has a limit.
Because of effective marketing and consumer ignorance—instead of using credit cards only when absolutely necessary, then paying it off immediately, millions of people are getting caught up in the glitz and glamour of purchasing items they would not think to purchase if they were using cash. This has resulted in Americans owing more than $840 billion on credit cards with the average household having up to 4 credit cards with an average balance of $6,500 accruing at an average annual percentage rate of 18 percent. Given the fact the average consumer has the tendency to make the minimum payment on their credit card while at the same time continuing to make new purchases, it can take up to 40-plus years before the credit cards are paid off.
While the general public is running up credit card balances for a myriad of reasons, credit card issuers and merchants are reaping huge profits. Merchants know from statistical data that people will generally spend 30 percent more when using a credit card vs. paying cash. As a result, merchants are willing to pay card issuers between 1-6 percent merchant discount fees on every transaction a credit card is used for. This charge to the merchant is generally passed off to the consumer by way of higher prices. Credit card issuers generate revenue three different ways with credit cards—merchant discounts fees, interest paid on the balance and various fees such as member fees, late fees, cash advance fees, and over the limit fees.
Be mindful in how you use your credit cards. Purchases you make with plastic that are seemingly innocent can literally take your financial life away. Don’t play with plastic! Plastic can smother you!
Here’s a financial guardrail I teach regarding credit cards: Never carry more than 2 credit cards with a $2,000 credit limit each. Never allow the credit card balance to be more than 30 percent of the limit. Therefore, you’ll never have a balance higher than $600 on either card at any given time.
(Damon Carr, Money Coach can be reached at 412-216-1013 or visit his website @ www.damonmoneycoach.com)