I was pretty cool when I got my first credit card. In fact, you would have thought that I'd gotten a promotion with a big raise instead of a piece of plastic that quickly drained my bank account.
That's because it was so doggone convenient. You can use credit cards 24/7 and for almost any reason, from buying food at your local convenience store to an automobile. You can buy nearly anything before paying for it - which certainly fed into my "I want what I want when I want it" lifestyle when I was younger.
Yep, I bought into the "cashless society" notion because, with my cards, I could carry less cash and buy whatever I wanted - even when I didn't have money in the bank. Yep, I thought I had it going on.
Credit verses Debt - What's Really In The Name?
But here's the real deal. Credit cards are debt cards, no matter how you spin them. And if you need to get a handle on using them, always think "debt card - debt card - debt card" when you're about to use one. This simple exercise can help you save hundreds, if not thousands, of dollars in interest on credit card payments.
Credit card companies, banks, and other lending institutions will happily let you make minimum payments on your credit limits forever, making them tons of money. At the same time, you save none—a terrific deal for them but a terrible one for you.
It's Easy To Lose Track of The Money You Spend
When you go shopping with credit cards, you choose the items you want to buy, and the cashier swipes your card - which is where the problem starts. Specifically, you still have all the things you started with – and there's no less money in your purse or wallet to remind you of what you've spent.
To make matters worse, there is a tendency to underestimate what you spend using credit cards. Especially smaller amounts, until they sneak up on you and suddenly mushroom into colossal debt, leaving you wondering what you got out of the deal - a toaster, leather jacket, a vacation to Disney World that you're still paying for three years later? That little for a $5,000.00 balance?
And, of course, this all happens without you even noticing. It's like the way cell phone bills pile up - the monthly bill is hardly ever the amount that you signed up for.
Credit card companies want you to keep using their cards and thus pay interest. They will do everything they can to stop you from paying off your debt to them before you've paid them lots of interest since that's how they make a profit. Further, the more debt you show you can pay back, the more they'll try to offer you increased credit lines until they get you to the point where you can't pay.
Money for Nothing, But it's Certainly Not Free
Using credit cards is an effective method of losing a percentage of your income to a credit card company in exchange for nothing. How? As soon as you run a balance, you're paying heavy interest until you fully pay that balance off. Further, paying those bills with your wages prevents you from gaining interest by having cash in the bank. In effect, you lose twice.
Sometimes Credit Cards Just can't be Avoided
Still, there are times when credit cards are necessary. For example, they can save the day when you need money in an emergency. When applying for a mortgage, credit cards show you can successfully manage debt. However, remember that credit cards are primarily a liability, so use them carefully.
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