As a result, credit cards have become a major instrument in household financing. Although not wishing to dampen the spirit of capitalism and the consumer society, as I see it, for many struggling families the availability of unsecured credit is more of a hindrance than a help. Yes the convenience of instant money fits so well with the must-have-it-now society, that it is just too easy to buy first and think about affordability later. And that is precisely where many people come unstuck. Firstly, using your plastic is usually the easiest way of getting goods on unsecured credit. That means that no collateral is needed to get your money to buy. The goods cannot be handed back to the bank if you find yourself unable to pay pack This is unlike chasing a bank loan or hire-purchase where physical goods, a car or a house is mortgaged and can be sold by the lender if the loan is not paid. With unsecured credit the card company will charge interest and fees on the outstanding amount, commonly at much higher rates than the federal reserve's declared rate, until the outstanding amounts are paid or the customer goes into bankruptcy.
For many average and even 'wealthy' householders, the availability of credit cards has meant ever increasing debt, hardship and bankruptcy in many cases. The demand for credit has never been stronger, but the supply is overwhelming. How many banks and stores have you seen offering yet another card or luring you into churning from one card to another or more commonly extending your credit with increased limits making it easier for you to spend more and more money you do not have.
The burning drive for credit has been fueled as we have said, by the growing consumer society. It seems we can no longer be satisfied with last season's clothing, and your car and PC from a few years ago no longer has all the latest features or it lacks sufficient 'grunt' to enable you to do the work you bought it for. And your kids must have the latest X-Box or PlayStation because the technology has moved along and the graphics are better in the new one. Well if you have been around for more than five minutes, you will realise that if you want to be always at the cutting edge of technical innovation, you will be trading up or acquiring new gadgets every other month! And that my friend is financially irresponsible.
I read somewhere recently that the average credit card holder is spending ten to twenty years paying off credit card debt, on basic monthly payments, that they procured in their twenties! We can only hope that their spending was for long lasting items - but most likely the goods have long since been disposed of, the sumptuous wedding or vacation only a vague memory. And another statistic worth mentioning is that the average U.S. college graduate begins his or her post-college days with more than $2,000 in credit card debt.
Where I come from, interest rates on plastic cards can vary between about 11% (with annual fee of $50) to around 17.5% with no fees, no frills. Off the top of your head, how long will it take our average student with a $2000 debt to clear it at 12% interest, no fees and minimum repayment of only $40 a month? How does 6 years sound? Frightening isn't it!
But credit cards are not all bad, especially if you educate yourself as to what and when you will be charged and evaluate what you are buying (as distinct from what you are spending) and how long it will take to pay it off. By embarking on a long term credit card debt for something that will grow in wealth over time, i.e. an investment such as a collectable, artwork etc., you are effectively investing by using other people's money and as such could be considered an effective strategy. But you would want to hope that the growth in value of your investment outstrips the cost of the money - i.e the interest on the repayments. Will that painting have a growth of 15% a year? What about shares? You see there is always a risk that you may end up paying too much. The wise use of instant credit is in a situation where you know that you have the cash invested somewhere to cover the purchase, and you use your card to snap up the bargain and then clear the CC debt once you redeem your cash.
Recently, an internet marketer wanted me to purchase his wealth-making strategy using a credit card, arguing that the cash I would make with his system would easily cover the charges on the card and I would back in the black in a few months. Yes you are borrowing from the bank, using other people's money, which is considered a good strategy for acquiring assets, but if you are using money you do not have for something that is unproven, that is a potential liability then this must be considered a risky strategy. By the way, we are still waiting for his gambling system to make any money.
Purchases on a whim, or because your stuff is 'outdated' is a classic way many people build up credit card debt for things that are non-essential. The wiser consumer keeps a balance between the things they 'need' and the things they 'desire' Needs are those essentials like rent, food, new tyres for the car. That weekend vacation, computer upgrade or TV are luxuries if you have not saved the money. Credit card spending on either type of purchase should be avoided, but if credit is needed, opting for new tyres is the safer option. Saving is largely unknown to our consumer generation. When my parents wanted a holiday, new refrigerator or entertainment, they put money aside from their fortnightly wage packet in an interest bearing account and paid cash for everything except houses or cars. But this took time, effort and consistency. Far easier to spend all your pay and borrow for all you 'need' right now! But although we cannot dwell in the past, there are some practical rules we can take from the past. Placing purchases on credit cards should never be entered into lightly because you really need to consider if you absolutely need the item. More importantly, paying off a vacation or a new article of clothing ten years down the track seems a little stupid. By the time you have these things paid off, they will be forgotten and discarded.
To re-emphasise, weigh the need and desire for purchases seriously, calculate the interest that you will pay, and the amount of enjoyment or productivity that you will derive from them. Car tyres—those are a must have purchase, and putting them on your credit card is not a major financial commitment. Well, that is unless you are putting the tyres on your credit card so that you can use your cash for an upgraded car stereo. This choice falls into the financially foolish category because using credit for a necessity tires so that you can make a luxury purchase is the equivalent of putting the luxury item on the credit card. Ask some questions: Is it a need or a desire? What is the real, total cost of the item, including interest? How long will it take to save for the item, putting the repayment amount into an interest bearing account? For example, I deposit regularly into an account online with a major international financial group paying around 6% pa interest. Not a lot, but with compounding I can hit my savings targets quicker than keeping cash in my wallet or borrowing on credit and as long as I am earning at a greater rate than inflation, my wealth is growing which is a better feeling than being in debt.
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