Credit cards are bad, or are they? I actually think they're occasionally very useful to many people but for some, they can be rather dangerous. There are a few things in this funny old world that we can be pretty sure are bad. Hitler, Trump's hair, bus rides in America, the sushi you can buy at gas stations etc.. I could go on, but somewhere around item number 1,573 on 'Pete's list of bad things' we find credit cards. It's not at the top, but it's certainly not in Carebear territory either. Obviously, they're a tool so they can't be 'bad' technically but I'm going to lump them into the bad category due to the damage they can cause. Actually, rather than blame credit cards let's all agree that it's bad the way the banks and institutions often try and sell them to people who are about as financially educated as my dog - and trust me, my dog's an idiot, even for a dog.
Why credit cards are bad for some people
Ok so let's get this straight first, I have and use credit cards in my day to day life as well as when I travel. They're actually invaluable (or access to 'plastic money' is invaluable - debit or credit), but for some people, credit cards are bad, dangerous and just too shiny for their own good. Below are some of the dangers of credit card use. Today they are basically a necessary evil, which makes them all the most perilous.
Expensive money
Everyone knows that credit cards are expensive money, but it's not until you actually do the maths on them (or find out first hand) that you realise and the level of scary goes from 'Yeh my mum always said credit cards are bad' to 'Holy shit, that's just evil!'. Let's explore.
You owe $5,000 on a card with an interest rate of 18%, if you repay only the minimum amount of $102 per month, it would only take you 33 years and cost $12,181 in interest! WHAT A BARGAIN! Assuming you didn't use the card again or change anything. That's about as far from a good deal as you can humanly get.
Here's a good government built calculator have a play and see for yourself.
It's not 'real' money
How good does a crisp $100 note feel? It's real money, you can touch it, make paper planes out of it and snort cocai.... I mean drink milkshakes through it... and it actually feels like it has value. This means that you're less inclined to spend your $100 note than if it were a bunch of 1's and 0's in your credit card account. There's lots of research out there that explains why credit cards are bad for some people because they're more inclined to spend with credit cards than with cash as they value them differently. People place more value (so are less inclined to spend/break) on cash as opposed to 'imaginary' plastic money.
No light at the end of the tunnel
Another reason that credit cards are bad when compared to other forms of debt is that there is no 'end' to them. You can spend, pay, spend, pay etc.. buying, paying, buying over and over without an end date or conclusion. If you have a personal loan of some sort, at least there's a tangible end date to the deal that creates a sense of finality to things. There's a day when it will be over. Credit cards have no end date so as long as you have the card, you're in that cycle forever.
Credit limits, limit
Credit limits are there to protect the credit card company from you overspending then just moving to Mexico and never paying them back, it's a risk thing. It's also in their best interest to offer you the highest limit you could possibly stand and lock you into a debt cycle. It's a balancing act that they are very good at predicting. That's how they make so much money. So you're a good fellow and always pay off your balance each month? Great, but did you know that your credit limit counts against you financially? So if you want a home loan, the banks will do their due diligence and see that you have a $20k credit limit with a $0 balance. Guess what? According to the bank, you're $20k in debt and that's not helpful if you're trying to buy a house.
Balance transfers are a sneaky trap
This is a great example of why credit cards are bad for some people. Balance transfers claim to be there to help you get out of debt but sneaky high revert rates (when you don't pay off the full balance before the intro rate is over), late payment fees, transfer fees and spending further on the old card (the shiny new $0 balance is a trap man, for the love of god!), all mean that unless you have a steely will and a heart of stone, chances are (considering you're resorting to balance transfers in the first place) you're going to make a mess of it. It's not a get out of jail free card and many people get further into debt by using balance transfers. You have been warned.
Rewards are another sneaky trap
You spent $100,00 and got a free toaster.. yay.. Also, the rewards program cost you $199 per year to be a part of, not even including the annual fee. That's one god damn expensive toaster! Can you hack them? Sometimes, if you're smart, organised and don't mess up even once. People love to talk about the intro point reward programs where you get say 50k or 100k points when you join up, which sounds great, but just make sure they don't hit you with the $500 annual fee in the first months' bill (looking at you AMEX) as this basically makes the reward program redundant. Never spend real money for rewards. If you actually want something, buy it like a normal person, it's probably cheaper and you don't have to wait 2 years to get enough points to cash them in.
Credit cards are bad but what are the alternatives?
So what are your alternatives to credit cards? Well there are a few options that I actually go over in this previous post about travel loans and borrowing for travel, but in summary: Borrowing the money in the form of a personal loan can work and there are some big advantages over credit cards, like the fact that you have a really tangible end date to the loan, so you can't keep spending on the loan etc.. Many people find this much easier to deal with, both practically and mentally. The other advantage of a personal loan is that if you have difficulty paying it back you can often work with the provider to create a payment plan. In fact, some lenders like Ferratum, have very good reputation in the industry for this level of customer service so if you do go down this path, make sure you use a lender who can be flexible like this.
The other alternatives are borrowing form family and friends, dangerous as you both will put more at risk than just money, lean on the bank of mum and dad wisely. The other option that's always a good'un.. maybe try saving your money and budgeting for things. There are big advantages to debt and in fact, the world is built on debt but it's a double-edged sword that can be as useful as it can be dangerous. Credit cards are bad for some people but great for others so be careful, know how they work and know your alternatives.
Any comments or thoughts on the evil's that credit cards do? Hit me up in the comments.
