One of the big reasons we racked up a total debt of $109,000 was due to credit cards. We used credit cards to live beyond our means for years. We used credit cards when we fell short for food or wanted to dine out, or when summer vacation time came. We were unorganized and used the “if we can afford the minimum monthly payment” mentally for a number of years. We had as many as five credit cards all carrying balances at one point. When new credit cards rules took effect in 2010 for things like minimum payment and annual percentage rates (APR) we sank deeper into trouble. We continued to overspend and maxed our cards shortly after, only to hit rock bottom and finally wake up in June of 2010. We have a single credit card today, with a $1k limit, and as we are just months away from being debt free I have no interest in jumping back into the credit card game. I realize this is a highly debated topic in the personal finance world and usually comes down to personal preference.
Credit Card Pros
- Immediate access – unexpected emergency
- Security – Lost cards can be canceled, protection against unauthorized purchases.
- Rewards – Cash Back, Airline miles, etc.
- Tracking – Allows you to keep records of your expenses and monitor financial activities.
Credit Card Cons
- Easy of Spending – spend more money then you have,
- Balance carry over – incurring interest charges for each month you carry a balance.
- Late payments –interest and late fees increasing your overall debt.
As far as credit card pros go, I plan on covering the immediate access to a fully funded emergency fund. Over the last four years as we repaid our debt we had a modest $1k e-fund that covered all of our emergencies. For security, I have similar protection with my VISA branded debit card. We have used it to book travel including car rental, hotel, and airfare without issue. As someone who is now organized and has a budget, I do my own tracking and don’t need a statement from a credit card company to do it for me. As far as rewards I think this is a true benefit. In researching the latest reward offers the best cash back offer in 1.5%, so if I spend $10k on a card offering me this reward I earn $150. Not bad, but I won’t be retiring anytime soon on this rate of return. The credit card cons scare me, it’s too easy to use the card without having the cash to make the payment in full, and that dominoes into the interest charges, and increase debt. According to credit card.com the nation average APR of credit cards is 15.03% and the low-interest card is above 10%, so you will very easily outpace any rewards you may earn with these rates.
A credit card is a tool for a consumer, just like a hammer is for a carpenter when used wisely can be very effective, when used unwisely can cause major damage. I’m not ready to start swinging a credit card around just yet. Once we are a have a few months of debt free life under our belt and a sizable increase in our e-fund I might break it out of the toolkit.
What’s your take on credit cards? Do you currently use them?