THE CREDIT CARD - START AND STAY DEBT-FREE
What does a credit card do? Silly question, right? Everyone knows how to use a credit card, but what do you know about the credit side of a credit card? Investopedia defnes “credit” as an agreement in which a borrower receives something of value now and agrees to repay the lender at some date in the future, typically with an additional fee attached, known as “interest”. The card is simply the medium with which the transaction is conducted. For example, say you buy a new pair of $70 jeans on your credit card. When your credit card bill arrives some time later, you are reminded that your card charges you 15% interest, so your bill (and thus, your jeans) actually end up costing you $80.50. Di erent credit cards will have di erent amounts of interest, di erent lengths of time before you actually owe interest, and many even have rewards programs. Obviously, there’s a lot to consider when using a credit card and understanding the credit behind it.
A credit card tests your nancial discipline and resolve. When used properly, a credit card can be a useful tool to build good credit and improve your credit score. However, in a society that screams, “I need it now, I want it now!”, the credit card can feed that urge and provide an avenue for an individual to give in to those temptations. An August article by Market Watch says that, “Americans had $1.021 trillion dollars in outstanding revolving credit in June of 2017” - a record level of revolving credit! This clearly tells us that many Americans are living outside of their nancial means. If you choose to use a credit card, be responsible! Only charge what you can a ord to pay o monthly and eliminate monthly balance carryover. The rewards and incentives are great, but do not let that entice you to overspend.
A very common way for this lack of nancial discipline to occur is by allowing young people and newly independent college students access to get a credit card. They often have meager monetary resources and are easily persuaded by the ability to get what they want, when they want. I can remember clearly my frst day as a young freshman on the university mall, seeing all the credit card booths. These companies worked so hard to get you to sign up, even offering free school swag as an incentive. Young, impressionable adults, trying new things, now have this new resource that allows them to take part in virtually any activity they want with a swipe of the card. Little does this person know, but they are at the beginning stages of a vicious downward spiral of continuous debt and poor financial habits. Fast-forward a month from that point and this young, naive college student has had the time of their life, but now cannot a ord to pay the bill in full.
Credit card companies know all of this, of course, and their marketing departments know how to appeal to the younger generation. Unfortunately, our educational system usually lacks education on money management as a critical life skill, so nancial habits are often instead learned behaviors that come directly from parents and other family members. As denoted by the
large revolving debt number above, when it comes to nance, unwise adults are passing their habits on to children.
The question then becomes, how do you set yourself up to succeed nancially? The answer is actually relatively simple! First, you must always start with a budget. With a good budget, you can always know where your money is going. Make sure you include a savings category. Next, have the self-discipline to spend less than you make. If you can learn to live on 80% of your income, you will start the process of developing sound nancial habits that can last a lifetime. Finally, learn to live within your means and have the self-discipline to say NO! You can’t a ord to do everything all at once!
The bottom line is that the wise use of credit is a critical skill in today’s world and if done correctly, can be a great thing. But if used unwisely, credit can rapidly turn from a useful tool to a crippling burden. As a nancial planner, my hope is that our younger generations improve their nancial I.Q. to live a debt free, more stress-free life.