CLIMBING A MOUNTAIN OF CREDIT CARD DEBT- PART ONE

I know Mesila is against using credit cards, but I find myself often resorting to paying with plastic. As a result, I’ve built up a bit of a balance on my credit cards and I’m wondering if you have any advice on the topic.

Mesila is not, in principle, opposed to credit cards, nor do we consider cash the preferred payment method in all situations. One of Mesila’s guiding principles is to promote financial management principles that are universally relevant, while avoiding specific suggestions. So we will share several general guidelines regarding credit cards that should help you decide for yourself.

Credit cards can be a very convenient tool, when used correctly. The trouble is that many people misuse them by charging more than they can afford each month. Credit card companies actually count on people misusing their cards; in fact, interest charged on outstanding balances is the primary source of revenue for credit card companies. 

There are many advantages to using credit cards. You never run out of money. You are insured against theft and can easily cancel a lost card, while cash that is lost or stolen is gone forever. You can use your credit card to pay by telephone or online, rather than mailing a check or paying by cash in person. Most credit cards can be used worldwide, and you can order cards for all your family members. Depending on the card-issuer’s policy, credit card purchases may be protected against theft, loss, or accidental damage that occurs within a certain period of time. Credit card statements enable you to easily track your purchases. Cash, on the other hand, has no paper trail, and it’s difficult to remember exactly where all that money went.

All of these advantages are actually available through bank or debit cards as well (with the exception of purchase protection). The big difference is that these cards draw only on money in your bank account, rather than creating a debt that has to be paid at the end of the billing cycle. The only major feature credit cards offer that debit cards do not is the possibility of earning airline miles, cash-back offers, or other perks.

Now let’s talk about the drawbacks of credit cards. First of all, credit cards make it deceptively easy to spend money, whether or not you have it. Swiping a credit card is not nearly as painful as taking actual money out of your pocket, and the psychological deterrent to parting with your money is therefore lessened considerably. Studies show that people spend about 30% more when paying by credit card than with cash. The second major drawback is that credit cards are a form of loan. You’re actually borrowing money — but without realizing it. A loan in which you realize that you are borrowing is preferable to one in which you are unaware that you’re borrowing, because you’re less likely to borrow unnecessarily, and more likely to repay, when the decision to take the loan was a conscious one.

Credit card debt is one of the worst forms of debt, for two reasons: One, it usually carries very high interest rates. Two, there is no repayment deadline. As long as you keep making minimum payments, credit card companies are quite happy to keep tacking on more interest, letting your debt balloon to ever-greater proportions. 

In addition, there is little limit as to how much credit companies can raise your rate. Should you make a late payment on a loan, a different credit card, or a utility bill, your interest rates can be increased dramatically, even if you’ve never missed a payment on that particular card. Bouncing a check, exceeding your credit limit, getting a new credit card, and applying for an auto loan or mortgage are other reasons you may see your rates spike.

Because credit card debt is so dangerous, the only people for whom credit card use is advisable are those who: 

(a) can rein in their spending despite the convenience of plastic and 

(b) pay their balance in full every month. 

People who swipe their cards without giving it the same thought they would when spending cash are better off spending cash, unless they’re paying for something that they cannot possibly be spending more for by using a credit card (dental work, for instance, or a utility bill). And people who carry over a balance on their credit cards, even occasionally, should probably avoid using credit cards completely.