Credit cards. They are truly one of the easiest and worst ways to accumulate debt. Far too readily accessed, and with exorbitantly high interest rates, they are a recipe for financial disaster when placed in the wrong hands.
As it turns out, the wrong hands equates to almost half the US population. 2017 stats show that nearly half of all American households carry credit card debt. And the total annual credit card debt in the US in 2017?
$905,000,000,000. Yes, that’s 905 Billion dollars…..billion with a B. And that’s just in the US.
A 2017 study conducted by Harris Poll showed that 41% of people surveyed indicated that their credit card debt resulted from making “unnecessary purchases that they couldn’t afford”. That suggests a whopping 371 billion dollars of credit card debt stems directly from items that weren’t needed, and didn’t fit in the budget. But let’s be real, those were just the people willing to admit that their purchases were unnecessary AND that they couldn’t afford to make them, so the true amount is likely quite a bit higher than 371 billion.
In Canada the situation looks pretty similar. About 46% of all people who have credit cards carry credit card debt. And like the US, the vast majority of it results from unnecessary purchases they simply couldn’t afford.
To make matters worse, an Ipsos Reid survey concluded that 1 in 3 Canadians incur significant stress as a result of credit card debt. And yet each year credit card debt continues to climb?
So to summarize – we are engaging destructive behavior (spending more money than we make, on things we dont really need), and it’s making us feel like crap, but we can’t stop. In fact, we are getting worse. I don’t know about you, but that sounds an awful lot like an addiction problem.
Clearly, as a society, we need to change the way we look at and use credit cards.
There are tons of very compelling reasons NOT to use credit cards, but all of those reasons boil down to one really key factor. Are you a person who is in control your spending, or is your spending in control of you?
If you currently carry an ongoing balance on your credit card, the reality is, you have over spent. You may feel like you had good reasons for overspending, but no matter the reason, it still means you have tried to pay for something that you didn’t yet have the available funds to achieve, and your financing it at a crazy interest rate. All of which means you should have waited, or you should have planned better.
I’m not going to use words like never and always here, because in finance blanket statements just don’t work. But it’s the rare case where financing something via credit cards is the right financial move. Very, very, rare.
So if you have credit card debt, your spending habits need work, and your focus should be on eliminating that debt and creating an emergency fund.
Now that I’ve said ALLLLL of that – if you truly have your spending in check, and you have a demonstrated track record of no credit card debt, consistent savings, and you ONLY use your credit card like cash (IE: you only buy what you have the money to pay for), the rest of this post is for you. After all – it is titled 3 reasons you should use a credit card!
If you really, truthfully, 100% honestly are in control of your spending, you really should be using credit cards as much as possible. Not using one is like throwing money out the window, and here’s why:
1 – If you consistently use a credit card for all your spending it is one of the easiest way’s to track your spending habits. No need for an additional app or spreadsheet at home, you can pull up your credit card statement and see exactly where your money is going. Particularly if you share a joint card with your spouse. You both can see where you are spending your money, and you are accountable to each other for it.
Tracking your expenses, even when you are a disciplined saver, also adds an extra level of accountability into your spending. Even for the most diligent penny pincher it can be easy to lose track of the smaller expenses and to know just how much has gone out the door during a particular spending period. With a credit card it’s right there in black and white, and there’s no ignoring just how much you’ve spent and where you’ve spent it.
And no matter how you slice it, financial accountability, to yourself and to your spouse, translates to less money spent.
2 – Credit card companies BANK on the fact that people suck at managing their spending habits. They love that most clients carry a balance and pay them ridiculous interest rates seemingly into perpetuity. And because of it they are willing to compete for your business, with some pretty huge incentives.
From travel rewards to gas, groceries or cash back, there’s a card out there that will offer you a reward system that suits you. Meaning it offers you something you would otherwise b spending your hard earned after tax dollara on.
More often than not the throw in some pretty big bonus incentives when you sign up. So if you’re not using a credit card, you’re missing out on an average of 2-6% return on all of the money you spend. The key is to not spend those reward points or dollars on things you don’t need!
Get gas or grocery gift cards, and when you spend those cards ok your usual grocery bill or fill-up, IMMEDIATELY put an equal amount of cash directly into your savings.
While you can’t put mortgage or vehicle payments on a credit card (darn it) you can put pretty much everything else on one. Whether it’s monthly bills, like internet, or insurance, or even shopping at your local farmers market, these days you can pay for almost anything with credit.
While the cash back cards tend to have lower return rates, they will often allow you to choose a few categories of spending that will give you a higher return. IE: you’ll get 4% back on groceries and gas, but only 1% on everything else. That can be extremely advantageous if the majority of your purchases tend to fall in only a few categories.
If your family likes to travel, travel rewards cards are often where you will find the biggest bang for your buck. With added travel protection, lost baggage, and car rental insurance etc, these cards can cover off a lot of areas that might otherwise incur you some substantial costs, all while giving you some of the highest rewards returns. Right now we use the TD Infinite Avion. As far as travel rewards cards go, it is one of the best in Canada. Has a great return rate, and is extremely flexible in terms of rewards redemptions. The US however is a whole other ball game. The offers are WAY better than what’s available in Canada (jealous!), and they are always changing, so it’s worth staying on top of and shopping around annually.
Bottom line – if you are going to be spending the money anyway, you might as well get something back for it.
3 – It’s way safer to use a credit card. With cash you run the risk of losing it, or even having it stolen. If your wallet is lost, good luck getting the cash back. With a credit card, you can just call in and report it lost/stolen with minimal impact or inconvenience.
Debit cards carry their own risks. If your PIN number get’s compromised and your account emptied, depending on the circumstances, you may very well be on the hook for any money lost.
With credit cards, if your card number gets compromised and used for fraudulent purchases, it’s a rare case where the loss won’t be completely covered by your credit card company.
It’s a layer of removal from your actual money, and helps keep you just a bit more protected. Not to mention the variety of insurances and guarantee’s that are available through most credit card companies to take it one step further and provide protection for your purchases as well.
All in all, if you can be responsible with your credit, and approach your spending in a disciplined manner, you can and should take advantage of the rewards credit cards can offer.
Otherwise your just leaving money on the table.