So you think credit cards are horrible financial tools that saddle their users with a 21.99% APR, locking them into a life of perpetual debt? Maybe you’re right. But you should realize that if used optimally, credit cards can serve as something more akin to a time machine.
Before we get into the magical aspects of the credit card, though, we should explore how they work. Just about everybody knows what a credit card is—a rounded-edged piece of rectangular plastic that allows the wielder to acquire goods and services in lieu of payment. At least that’s how many people treat the transactions. Of course, you will need to pay for all those purchases in the future. There’s a little “time machine” element there, but that’s not what I referenced earlier. Patience. We’ll get there.
Credit card companies make profit by affording you the luxury to “buy now, pay later.” Some charge you an annual fee just for the privilege of using them, but these should generally be avoided. All of them charge the retailer a processing fee in the range of 1.5% – 3%. This is guaranteed profit. Their real revenue, though, comes from the absurd interest rates they charge for balances that aren’t paid in full by the due date a month or so later.
Why am I rambling on? You know all this. You likely hold some portion of America’s $1 trillion in credit card debt? That’s about $8,400 per American household, on average. Caveat time: I’m aware that not all people are able to, or even desire to, access credit cards for one reason or another—past bankruptcies, credit issues, immigration status, self-control issues, etc. I understand this. If you fall into any of those categories, you are excused. I’ll see you next Wednesday. Otherwise, keep reading because I’m talking to you. And I know, I’m not “talking” to you, nor will I “see” them next week. I’m not a dumbass!
Anyway . . . say you walk into Walmart and see a Big Foot Adult Halloween (One Size Fits Most) Costume. . . Who am I kidding? You’re searching Amazon and see two identical Big Foot Adult Halloween (One Size Fits Most) Costumes from separate sellers. Exact same costume, same tax rate, no shipping on either, both from respectable sellers, each with an average of 4.6 stars, either deliverable tomorrow with your Amazon Prime membership, etc. Everything’s exactly the same. Except the prices. One costs $100 while the other is only $98. Which do you choose? It’s not a trick question; you’re spending $98! It would be financially irresponsible to pay the higher price.
Sure, someone out there would still choose to pay $100 for some crazy reason that only makes sense in their heads. Be sure to speak loud and slow to this person when you tell them: YOU. ARE. A. DUMBASS.
This same concept of paying $98 instead of $100 is mirrored with credit card -vs- cash payments. Since credit card companies stand to rake in all those interest charges from people who carry balances month-to-month, they entice you to choose their service from among the crowded, competitive market. They do this through perks, often in the form of cashback. This is where the savvy consumer shines. Many cards offer 1% – 2% cashback on every purchase, even up to 5% on a rotating list of retailers. I don’t know of many places that give a comparable discount for cash purchases. Paying $100 in cash when you could use a rewards credit card and pay a net of only $98—that would be financially irresponsible.
Beyond the short-term financial rebate, there is a long-term benefit as well. Cash payments do nothing to boost your credit score. But a lengthy history of credit card use with a history of on-time payments will prove instrumental in raising your credit score. A high score will decrease your interest rate on future mortgages, auto loans and other lines of credit, thus saving you money on interest. All these benefits simply by paying with a credit card rather than cash. It’s a no-brainer.
The argument could even be made that cash need no longer exist. With the advent of cryptocurrencies, illegal drug transactions and gambling debts can now be paid without cash and remain essentially untraceable. So as long as Wall Street traders and the Hollywood elite can find something to replace their crisp, rolled up $100 bills to deliver cocaine into their upper nasal cavity, who really needs cash? But I digress.
I did a conservative calculation, and found out that by the time I retire, I will have earned at least 4 month’s salary via cashback. That’s a lot of money when considering all those purchases were ones I would have made anyway. I essentially crammed an extra ⅓ year’s pay into my career. Or, better yet, I can retire 4 months earlier. At least I can take an unpaid week off every now and again. Imagine that—four additional months of free time created out of a magical plastic rectangle. Obviously, this isn’t exactly the “time machine” I promised in the opening paragraph. Perhaps I was a bit clickbaity.
Frankly, I’m amazed credit card companies haven’t already used clickbait headlines: Credit Card Can Add Years to Your Life. I suppose, though, advertising like this would attract the wrong kind of user: the Deadbeat. This is the derogatory industry term for someone who uses credit cards in a responsible manner, paying off their balance in full each month, forgoing any interest. Companies would much prefer receiving only the minimum payment each billing cycle, thus maximizing the interest they collect in the long-term. I imagine they have a term for these folks, too. What would you rather be called: Deadbeat or Dumbass?
So you still think credit cards are financial monsters that usher users into financial purgatory? It’s far too easy to make impulse purchases when all it takes is a card inserted into a reader or numbers typed into a website. Purchases you would not have made had you needed to hand somebody hard-earned cash. Your overspending—along with that 21.99% APR—is the bread & butter these financial scoundrels rely on to profit year after year. That $98 Big Foot Costume could end up costing well in excess of $200! So, I guess, yeah, come to think of it . . . You’re Probably Right.
[010] September 16, 2020