Financial Freedom Quick Tip #6: Beware the evil credit card
I’m reading a very helpful little book simply entitled Debt, by Juliane Otterbach.
I recommend this book to anyone who is trying to get out of debt. It is simple, straight-forward, non-judging, and just easy to read and understand.
This is an excerpt from page 13:
Since the 1980s researchers have been comparing consumers who pay by credit card and those who use cash or cheques. People paying by credit card are willing to pay more than double the price for the same item than consumers paying by cash. They also make more instant decisions to buy something, rather than taking the time to think it over.
Which leads me to today’s quick tip…
Watch out for those credit cards!
It’s a psychological thing. Paying by credit card just doesn’t feel like you’re spending your own money. But have no doubt, you are!!
Credit cards have their advantages, especially in South Africa where it is not wise to be lugging around a wad of cash everywhere you go.
However, if you know your credit card is a problem for you, rather use a debit card. With a debit card you know the money you spend is money you have, and the amount you pay is going directly off your bank balance.
This tip is part of the Financial Freedom Quick Tips series. If you want to receive a notice every time a new quick tip is published, you can subscribe to Liberta.
July 15th, 2008 at 03:28 pm
in america credit cards are pushed on you as soon as you hit college and that is like free money to a 18 year old. then the bills come and they have racked up thousands of dollars in debt in months. it is terrible. i have seen it happen to alot of my friends. credit cards are bad. but older people tell you it is the only way to get credit so you can buy a house or a car. that is not true. you can go to a small money lender,for a small loan to pay back or paying back student loans is a big one. but i’m just a little pre-school teacher what do i know, except what works for me.
July 15th, 2008 at 03:27 pm
@Jamie: It’s the same thing here in South Africa. Young people are lured into credit as soon as they turn 18. And much the same reason – for a credit rating.
Utter hogwash.
Banks will fall over their feet to get business from you by giving you loans, whether you’ve had a credit card or not.
And to me it’s a ridiculous argument: make debt so you can make more debt.
If you really want to become wealthy and financially free you should avoid debt as much as is possible!!!
July 17th, 2008 at 12:00 pm
[...] Financial Freedom Quick Tip #6: Beware the evil credit card [...]
July 23rd, 2008 at 01:18 am
Alternatively, keep a credit card – but force the bank to give you a very low credit limit. e.g. R500 or so…
Using a credit card in SA has a huge financial benefit over a debit card in that you don’t pay a R2+ fee every time you make a purchase.
Some credit cards also have lower fees for banking overseas (if you plan to travel)
July 26th, 2008 at 11:16 am
I guess this post is more about self control with a credit card, because you can definitely use it to your advantage. Time value of money! The number one rule is: always reset to green per month. There are progressing levels. Step 1: Rather put money in credit card than cheque account that does not earn interest. Usually you need about R20 000 to open a 10% investment account, so work it up. Step 2: Once you have R20 000, move to higher credit interest account. Step 3: Buy everything from credit card (start each month at zero). You have up to 55days to pay interest free! End of the month, zero it again. Anything left, move to investment account. The trick here is that you must always reset to zero, then you are able to earn interest on borrowed money. When you manage to get that right, the next step (4) is if you do business trips that you can claim back. The moment you claim it back, move to investment account. You do not score that much per month (maybe R100-R250) on the zero interest borrowed money, but over time that adds up. And that investment just grows as well!
This is not a get rich quick trick, but if you can manage this cycle, you are not part of the typical debt trap.
July 26th, 2008 at 02:35 pm
@Gideon
Thanks for your insights!
And you’re right, it is possible to “make your credit card work for you”. I also follow this philosophy. Here is an explanation (it’s a bit technical, I apologize!!).
I have a credit card, but I pay the outstanding balance in full at the end of each month. This is the most important point – you have to settle your outstanding balance in full each month.
I also have an investment account (as you call it – my BOE online share trading “cash” account), where I always keep more cash than the money I spend on my credit card, and I earn 10%+ interest on the cash (tip: you don’t need any minimum balance with BOE).
Because the first 55 days are credit free, I’m effectively earning interest on money I’ve already spent (because I owe on my credit card interest free, but have the cash in my “investment account” where I’m earning interest), until the balance is paid in full at the end of the month. This is a small amount (usually less than R50 I’d say), but it’s money for doing nothing.
However, it takes a lot of self-discipline to manage your money this way. I carefully track and record everything I spend with my credit card, and when I buy something I always make sure I know – I am spending my own cash, this is just like buying with real bank notes.
The thing is, psychologically it is difficult for many people to feel like they’re spending their own money when buying with a credit card. I’ve found myself paying more for something that I should have, and realizing it later, even though I try to force myself to think twice about it.
The type of discipline you need to have with using a credit card comes naturally for a few people, but for many people it does not.
If you have this type of discipline, to think carefully about everything you buy with your credit card, track your expenses, and pay the outstanding balance in full at the end of each month, then fine.
But I’m still of the same opinion: For the average person, it is better to not have a credit card at all, thereby removing the temptation.