Good Reading

The Importance of Credit Cards, Part II

First and foremost, thank you for all of your comments concerning your feelings about credit cards – apparently, I touched on a topic that’s near and dear to many of you. Thank you for sharing your thoughts!

I was sitting at my full-time job Thursday when Future Husband emailed me.

Subject: CC?
“You should email that buddy of yours about the credit cards – not brother carl, the banker guy.”

Everyone needs a go-to person for financial questions. For me, it’s “the banker guy.” Because I value his privacy, I told him that I’d call him Waylon in this post – in honor of the nights where we would drink too much beer and sing loudly (and probably badly) to vintage country music while our friends stared at us like we were odd.

Anyway – Waylon is a banker and an all around smart fellow. From my perception of his life, I think that he has his financial life put together pretty well for someone in his early 30s.

I asked Waylon what he thought about Melanie’s question:

“The question of whether credit cards are good or evil more or less depends on who is using them.

I happen to be unbiased. I will sum up briefly what I believe are the pro’s and con’s.

Pros
1. Incentives from the retailer that can give you a large discount on the products purchased.
2. The concept of Time Value of Money. With a credit card, you can essentially use somebody else’s money for 30 days without paying interest. It is an interest free loan. The key here is that you must pay your statement balance every month. Otherwise your interest will probably be 18%.
3. The credit card may give you cash back or points. I have a cash back option that will make me about $300/year.
4. It will be a revolving trade on your credit bureau. It may have a positive impact on your score if you don’t go late and don’t have your credit cards maxed out. You actually get a higher score on your credit bureau if you have lots of available credit with low balances. As a banker, this makes no sense to me.

Cons
1. It is proven that if a person has a credit card as opposed to a cash only purchaser, they will likely spend 20-30% more. That is real money out of your pocket.
2. If you carry a balance from month to month, you can be paying 18% on the outstanding balance. If you average a balance of $5,000 for example, you will be paying $900 in interest annually.
3. If you consistently have your credit cards maxed out, your credit score may reduce.
4. If you become late on your payments, the credit card company may increase your already high interest rate to something unbearable.

My philosophy is never to buy something on a credit card unless you can pay it off in 3 months.”

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2 thoughts on “The Importance of Credit Cards, Part II

  1. This is a good summary – especially the last one, don’t charge anything you can’t pay off in 3 month. In the past I have gotten sucked into the “no interest for a year” or the like. In theory, it should be a free loan for a year – in reality, I probably ended up spending more than just paying cash for something – or ended up spending future money before I got it. So I’ve quit doing that too.

  2. Thank you so much for your post! You really hit the nail on the head with this one. With the economy the way it is right now with all the layoffs and more to come; government spending and deficit out of control; the continued housing slump; one wonders where to turn for help. It sure is nice to know that there are debt management companies out there that can help folks avoid bankruptcy and still keep their heads above water. Thanks so much for the taking the time to post this information.

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