One of my friends told me, credit cards come with so many benefits such as convenience, easy to buy, easy to track, lot of discounts, reward points, cash for emergency needs, free money for upto 50 days and more.
Hence, the question – what’s my take on credit cards?
Well, this was my response to him:
“Too many people spend money they haven’t earned, to buy things they don’t want, to impress people they don’t like.”
-Will Rogers
Why would bank (who are the smartest when it comes to math and money) give you free money for 50 days?
The simple answer is that they understand human psychology. In other words, they understand your behavior better than you do about yourself.
The reason why many experts strongly suggest avoiding credit cards is that the vast majority of those who are sold/given credit cards don’t read the fine print and have the traits of an addict. Let’s be honest, we all are addicted to something. We just stop being one, once we realize we have already wasted lot of no time, money, or energy.
We think credit card balance as an extra and free money to spend.
As soon as we get the credit card, the first thing we see is, where to spend. Little do we realize that it’s not free money. We’re not taking any loan from bank; we’re taking loan from our future self.
Banks are giving us the power to spend more and stretch our spending, however your productivity and income remains unchanged.
If you can’t afford to buy something that you desire now. What are you going to do tomorrow when you have a bill for previous purchases + new needs + extra desire?
“Avoid credit cards, “just forget about them.”
Warren Buffet
Suicidal interest rates and fees
Personally, I think buying a credit card is like ‘putting hand in the mouth of a crocodile’. This is because average annual interest rate for credit cards in India is above 40% and its similar throughout the world.
The moment you delay in your credit card payment. The crocodile wakes up and as your hand is inside its mouth, you can do nothing because you signed up for it. Late fee + interest on overdue balance + interest on interest (compounded).
Remember what this genius quoted:
“Compounding is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
Albert Einstein
When you sign up for a credit card, you go against the power of compounding. There is no other investment product in the world which offers such high returns for investors, not even equity guarantees that. This is why you’ll always see credit card salesman calling you, visiting your offices and pushing you to buy credit cards all the time.
The saddest part is, majority of people who buy credit cards are in the age bracket of 20s and 30s. With no financial IQ and more desires. Most of them default and fall into the debt trap early and their credit score is ruined. Then they think “Oh I don’t bother about credit score because I’m never going to take a loan”
However, little do they know, a bad credit score has far more consequences then you can ever imagine. You’ll need a good credit score for competitive exams, jobs. Employers are now conducting credit check as part of BGV (background verification). Even government for immigration and legal purposes can pull records too. You never know where life is going to take you few years down the line.
Psychological Reason
The physical action of handing over cash to someone else is a lot more difficult than swiping a debit card. A research done by The Journal of Experimental Psychology in 2008 concluded that when people made payments via cash, their spending reduced significantly.
It becomes worse when you make the payment via a credit card because you see some reward points or cashback. Try handing over Rs.7500 cash for a pair of shoes. It’s much more painful than just swiping a card.
My Story
I’m not a big fan of credit cards since the beginning. However, once I decided on purchasing a debit card with an annual fee as it came with a lot of benefits such as free movie tickets, discounts on dinning, shopping, rewards points and so on which I knew I use a lot.
At first, I thought it was a good deal as I could visualize the amount I was going to save annually with that card based on my purchase history. However, little did I knew that you only save from these cards when you actually spend. So in order to save more, you’ll have to spend more. Hence after a year, I noticed something shocking. I was saving more but my spending increased the most.
In order to get more discounts, reward points. I was spending on things that I didn’t really wanted. However, this was not the only bad thing that happened. I produced a bad habit of excessive spending, buying things I didn’t needed. Eventually, it becomes difficult to change these habits later when you’re forced to spend less.
“If you find yourself in a hole, stop digging.”
The Banker’s Magazine
Conclusion
Do you love shopping?
Are you an impulsive buyer?
You cannot control your desire to buy that product now and have no idea or a plan on how you’ll pay it in the future.
If the answer is yes to most of them; avoid credit cards.
The answer is very simple. Successful people do not have the strongest willpower or discipline. Successful people are those who design their life in such a way that they would be less tested on willpower and discipline.
Let me give you a simple example. Previously, I used Instagram and I’d spend hours scrolling and seeing how happy others are. But because of that, I realized I was taking notes silently on “how to spend money”, “where to go on vacation”, “where to go this weekend” and so on.
So at first, I resisted on not opening the Instagram App but it never worked. Then I made one simple change: I uninstalled that App, changed password to a very difficult one and logged out from all the browsers. Lo and behold, it worked. I’m more happier, I go to better places on weekend and vacation and I spend much better. You don’t need to take notes from strangers who’re trying to show-off. You can read about my experience here.
A small structural change is much better than strong willpower and discipline.
You can read Atomic Habits because you do not rise to the level of your goals. You fall to the level of your systems.
In some countries, you can’t avoid credit cards completely. You need them for certain purchases like in the US, it is mandatory for boarding in hotels. In that case, choose the one which has no fancy features/benefits and no annual maintenance fees.
The most important step to reaching financial freedom is living below the means (spending less than you earn). Today, I spend only what I need and buy luxuries that I can afford. Hence I decided to simply move to a standard debit card. I don’t want to load up my head with silly things about what to pay and when. We get limited hours in a day.
The best thing you can do in your 20s is to think like a wise old man in his 50s instead of thinking like a broke young kid.
Your focus should only be on investing in yourself, reading more, and finding ways to earn more and invest more.
“Cut up your credit cards. If you use a credit card, you don’t want to be rich.”
Mark Cuban
That’s all for today, folks. If this post was helpful, don’t forget to sign up for the weekly free newsletter to stay updated with my latest posts.
Until then, take care.