Why I Put My Credit Card Away
I have kept a credit card for some time now. The other day I was wondering why I got one in the first place, and after beating around the bush. I had to admit to myself that the credit card gives me power, security and prestige. Power to pay even when I don’t have money. Security in case of emergencies although, I have never had a real emergency in the last 5 years that required my credit card. As vain as it sounds flashing out a golden card and swiping it kinda makes me feel cool albeit, microscopic.
There are a lot of articles out there, arguing that credit cards are evil while others say that they can actually be helpful in financial planning. I pay off 100% on my credit card every month. So if you like, you can say I get “free” debt. The only charges I incur are the annual charges on my card. However, my personal experience has led me to conclude that credit cards impede personal financial planning. It requires a lot of discipline to use credit cards and achieve personal financial plans. Here’s why:-
Debt. The whole idea of a credit card is to enable one to purchase things on credit and pay later.On many occasions I have found myself purchasing stuff that I ordinarily would not have purchased had I not had a credit card in my pocket. To put it simply a credit card enables you to spend money that you don’t have, putting you in the red. Obviously, accumulating consumer debt will undermine any financial plans you have.
Difficult to stick to a spending plan. Let’s say in the beginning of the month I have budgeted 8k for household items.I then go shopping and swipe my credit card and feel good since this is a planned expenditure. At this point all makes sense because at the end of the day I have 8k in the bank, which was meant for my monthly shopping. My card now has a debt of 8k. So it all balances out.
Not for long because at the end of the month the chance of having the 8k in my bank is very slim, since some how I will have withdrawn it and spent it but, the 8k debt on my card will still be outstanding. Ideally with great discipline I should keep the 8k in my bank so that I can use this 8k to pay off my credit card at the end of the month.
Apply this to all the planned expenses you pay with your credit card. You quickly realize that it would be much easier to pay cash otherwise, you’re not going to stick to your budget. In short after paying with your credit card the likelihood of spending the hard cash meant for planned expenditure on other unplanned things is very high. Unless you immediately transfer the hard cash into your credit card account. In that case it would have been easier to just pay in cash in the first place.
Makes it easier to spend. Paying by card takes away the pain of counting out hard cash, making it easier to spend more than you would if you’re paying in cash. It’s one thing to swipe and pay 10k for your shopping and it’s another to count out 10k in hard cash and pay. Paying by cash is painful and you’re likely to spend less when paying by cash. Therefore you’re more likely to indulge in impulsive purchases when paying by card. I always get shocked when I get my statements on how much I have spent on my card. I actually tried this out and paid for all my expenses in cash for 2 months. I actually spent less.
Annual fees and exorbitant interest rates. I pay 6k in annual fees. In short I’m paying 500 bob per month just to have the card in my pocket. Is this worth it? I will not dwell on the exorbitant interest rates charged since I pay off 100 % on my credit card and I don’t pay any interest. However, most people pay the minimum payment and end up paying in excess of 25% p.a on interest. Now, apart from pyramid schemes and perhaps some businesses, I don’t know many investments that would give you a return of 25% per year. So this high interest rate will erode all your investment gains.
My biggest challenge with credit cards is that they make it very hard to stick to a spending plan or budget.Unless you are extremely disciplined and most people are not, I don’t see how having a credit card will benefit your personal financial plans. That’s why I put mine away.