All of my friends and family members are horrified at my personal approach to credit cards and their usage. It seems that the common idea is that credit cards are “evil” and should be used for emergencies only, and that you should always aspire to pay the card off in full at the end of the billing cycle. My mentality is that credit cards are like a little loan officer that I carry with me in my wallet for things that I can’t afford to buy with cash at the moment and would rather pay off over the course of a few months. My credit card has a low fixed rate APR - 6% - which means that even if I need to buy a huge LCD TV or other luxury item, I’m paying a tiny premium to have it now if I pay it off over the course of a few months. I’m more than willing to pay $10 in interest if it means I don’t have to wait or save for months to afford something I want.
I only use CC’s for things that I can’t afford to pay cash for, in this manner. Is that wrong?
If you’re only paying 6% interest, and you can be confident about having the future income to pay off your debt, then your attitude seems reasonably responsible. The onbly thing that you should ask yourself from time to time is, what would happen if you fell sick, lost your job, or had something else interfere with your income? Do you believe that you would be able to handle that?
It’s irrational behavior. The criticism is that 1) you’re paying a premium and 2) taking a risk. Mathematically it doesn’t make sense.
But so what? Frankly, I acknowledge these things and will use a credit card this way on occasion. I just keep my debt relatively low, so that if I lose my income, I’m not totally screwed.
Sounds like your friends and family all listen to Dave Ramsey. He thinks CCs are evil. He says even if you pay it off every month it’s a bad idea - he claims you spend more.
It’s totally fine. Most people don`t understand debt. Too many of them don’t understand debt and make awful decisions and ruin their lives or at least make them suck for a few years. I’d rather never borrow anything than that. But ideally, I’d understand debt and use it wisely.
Credit cards make it easy to buy without thinking. Secondly they hide the true cost. If you’re paying 29% interest that $100.00 item is costing at least $129.00.
Third, it hides the fact that while we’re sure we’ll pay it off at the end of the month, we often don’t
Lastly the fact that banks are cutting limits willy nilly now. You may feel fine having a thousand dollar balance but I have all my credit card limits cut severly. In my case it’s no big deal really but I could’ve been screwed.
Chase for instance, dropped my $10,000 limit to $500. Now I happened to have $600 outstanding on the card, but I was diligent and was able to pay it off. But if I couldn’t pay it off then each month I’d have been over my limit and subject to huge penalties.
Simply put credit cards are no longer stable or reliable. The interest rates change every 45 days and the credit limits go up and down. So now I’d absolutely stay away from all credit card purchases, simply because the banks backing them are so unreliable.
My BoA credit card, which I have no balance on has had the credit limit go up and down every 45 days for the last six months.
This new law is totally being abused, but what can you do?
There is nothing wrong with using your dredit card this way, provided you feel secure in your future ability to pay, and are comfortable with the extra money that each purchace is costing.
The credit card company likes you and you like the ability to spend when you want. Good deal for both.
However, should you become unable to pay, even for a short period, the credit card company will roll you over and make you feel like the central star in an abusive porn movie.
They will be relentless in the quest to get money, they will add late fees that equal half the amount of your minimum payment, and the whole thing will quickly snowball on you until you have to find a alternate source of funding to bail you out. Hope you have a house to refinance or a car to sell.
Kind of like owing money to the Mafia. As long as the payments are made you will feel loved. And they will break you legs if you don’t pay.
Don’t EVER miss a payment if you can help it. After one or two defaults or late payments (I forget exactly), they can jack your rate up to something ridiculous like 29% instead of 6% on TOP of all the other fees.
And God help you if you ever make it a habit, become accustomed to a lifestyle financed by money you don’t have, and then proceed to lose a job / get married / have kids, further plunging you into debt. It’s a very real slippery slope and that $500 TV soon turns into a $10,000 car and everything adds up real soon…
If you’re really that responsible, no problem. But are you?
I think it is wrong, yes. Not ethically wrong, just a bad idea.
That you choose to pay interest is not what I consider bad. Ultimately it is up to you to decide what is important to you and what you are willing to pay for it. In your case it sounds like having something now rather then later when you could pay cash has value for you. Having a $600 TV now rather than a month or two later appears to be worth $10 to you. That isn’t a decision I would make myself - but I just bought a music CD for $10 which has no practical benefit to my survival. Who am I to judge that your enjoyment of that extra time with your TV is less worthy than my enjoyment of listening to the CD?
On the other hand, buying things you couldn’t pay for with cash does mean that you are living much closer to the edge then I am. It means that you don’t even have an emergency fund or any sort of savings lined up anywhere. Otherwise you could just use those funds and not pay any interest, using the credit card as the emergency fund. I think that much risk is a bad judgment call. You are going to have a negative buffer in case of an emergency.
I would never purchase on a credit card anything that I couldn’t afford to pay cash for. That doesn’t mean that credit cards are evil. I use my credit card for practically every single purchase because (a) it is convenient, (b) it is cheaper than cash because the card has no fees and pays me back Amazon gift cards in points and (c) it is less risky than debit cards because even though in theory you are covered either way in the one case it is you telling your bank to help you get your money back after it is gone and in the other it is you telling your bank that someone stole their money. However I pay the card back in full every month and have never paid a cent in interest. At any point I could make a decision to pay for the items with cash.
That’s how I use my credit cards, and I do just fine. Most months now I do and can pay it off in full. Sometimes I don’t - but I always make huge payments. I also have the CC set up to automatically pay the minimum once a month, in case I forget. I always go back and pay more, tho.
My biggest decision to use my card when I’m out is “Do I want to have $0 in cash after this, or should I keep cash in my pocket for cash-only transactions, and just put this on the card?”
No one in my family bitches to me about it, because they know I’ve got my money together. People on this board tho still would say I’m insane.
But in my opinion, it’s probably a pretty bad idea.
It’s like shooting heroin.
Some people are able to do it occasionally and it brings them joy and enhances their life.
On the other hand, a hell of a lot of people get carried away and end up and end up in a mess that takes years to get out of.
A smaller number of people fuck up their life completely.
Maybe you have the discipline not to know you won’t get carried away. Congratulations. For me- no thank you. I don’t need that temptation in my life. I don’t need a tool that has screwed up the lives of so many people I know. If I don’t use them, I can know that will never happen to me. To me, it just doesn’t make sense to spend money that I don’t have. It wouldn’t really improve my life much, but it would put me at risk of some bad stuff happening. Just like I think it’s best not to shoot heroin occasionally, I think it’s better not to use credit cards.
Nothing wrong with it as long as you are aware that it costs you more to buy on credit. You seem to understand this in your post so no problem. Also as others are saying you need to be sure you can pay the card if something happens. You lose your job, end up in the hospital, etc you don’t want to miss a payment and that extra $10 you paid becomes $100 with the new APR and fees. Finally you don’t want to go overboard. First day you buy a TV, then a day later you buy a surround sound system. Next week you buy a blue-ray player. Then you need a new Lazy-Boy to sit in to enjoy it all. All of a sudden you are a few thousand behind, and are paying more and more.
What I do is treat my savings as a loan. If I want a new TV, and can’t afford it with my monthly allowance I will buy it with savings. I then pay the cash back into my savings over the next few months, and tack on some extra for my “interest rate”. This way if I can’t pay for a month nobody cares but me. Also my “credit limit” goes up as my savings grow. If I want a higher credit limit I save more for a few months.
There’s absolutely nothing wrong with this approach - provided you pay off your debtors.
I use my card in a similar way - I use it when I don’t have the cash upfront for a large purchase.
Same as you, I’ve concluded - X% interest is OK, if I would never have had the cash upfront.
People that say “any Y% interest is crazy! You’ll die in debt!” are silly. Sure, if I get too far in debt at the rate of Y%, I’ll lose it all. But I’m not a noob. I went to college, earning a massively math related degree. I know exactly what the deal is. Sometimes it’s worth it, sometimes it’s not.
As long as you understand the math involved, there is nothing wrong in using a card.
An APR of 6% isn’t bad. But like others have said, the second they can jack that up to 25% or higher they will. And they will use any excuse they can to do that. If you miss a car payment totally unrelated to your credit card, I believe they can use something like that to up your APR.
Also, when given a choice between credit cards and cash, people who use credit cards spend more money (one study found 12-18%) because using credit cards do not have the same psychological impact as paying with cash.
6% on a $2,000 TV is $10 for the first month. Over a year it would be $66.
The problem with credit cards is that you are living beyond your means. If the TV is the only purchase you make then you will not suffer horribly. However, if you continue to live this way then the devil will own your soul in an amazingly short amount of time. The more you owe, the less you have for future purchases so if you maintain your purchasing habits it will catch up to you.
True enough in general, but as to anything paid off at the end of the month, it actually costs slightly less (assuming the OP is getting at least some minimal interest on his checking account), because of the float.
How are you at delaying gratification? If you’re unable or unwilling to wait for, save toward, or work toward something you want, this could be trouble in general.
Your logic makes a certain amount of sense: you’re willing to pay a bit extra to have something a bit earlier than you otherwise could. In this respect, you’re not unlike the people who buy new electronics as soon as it comes out, rather than waiting a while for the price to drop. If you do pay off the “loan” within a few months, and don’t continuously carry a balance, I suppose this could work for you. Your approach probably makes sense if you have a reasonable expectation of earning more (or having fewer expenses) in the not-too-distant future than you do right now. But you’re never going to get wealthy this way.
For me, however, I don’t like the feeling that money I earn is already spent before I get it. By now I’ve got enough money in the bank that, if I want or need something, I can go ahead and buy it, without any need for credit—if I think it’s worth it. Or, I can hang onto the money in case something I want or need more comes along.
