Often when we meet new clients, it’s normal for people to carry some debt on their credit cards. Whilst it is pretty handy to have a large chunk of cash available to you at any given point in time, we need to understand that there are some major drawbacks to this approach. Credit Cards are one of the most profitable products a bank can offer, which usually means they are making money at someone else’s expense (i.e. yours!). There’s a reason why every airline, supermarket and department store are now trying to sign you up for their own piece of plastic; your loss is their gain!
It’s ok to be paying another business money and making them successful in the process, but only if they’re providing you with equivalent or a greater level of value in return (did somebody say ‘iPhone’?!). But I want you to consider the true value that you get from your credit card in exchange for the fees it is likely costing you. Yes you may get reward points and free travel insurance, but I think there’s no such thing as a free lunch.
Having worked with the Incite Wealth team for the past 6 months (probation over – woohoo!) here is why I think you need to be careful of how you treat your credit card.
1. Credit Card interest is wasted money. The interest charges are horrendous, which can mean racking up hundreds of dollars in interest per month. Imagine if that was going into your monthly savings…
2. Often the worst habits we have arise from there being a delay between the bad behaviour we carry and the outcome of that behaviour (e.g. smoking or eating unhealthily). The problem with the credit card approach of ‘buy now, pay later’ is that there are no immediate negative effects of your behaviour, nor does it teach you self-control with spending. Learning to plan for big spends is all part of the budgeting process and that is why we encourage every client to draw up a budget. Like they say “if you fail to plan, you plan to fail”.
3. Having multiple credit cards affects your chance of getting a higher mortgage amount and sadly, this can and does stop people from buying their dream property (a potentially far more valuable purchase).
4. Bad spending habits, usually ending with credit card debt, can cause fights with your partner (or even scare off potential partners!). Money is one of the main causes of arguments in a relationship, so it is always best to nip this habit in the bud now before it spirals out of control.
5. Any form of financing your shortfall every month on credit is a false economy. What do I mean by this? It muddies the waters of your financial life. Money comes in, money goes out, but you have this weird little debt on the side that relates to stuff from the past. Long story short, you never truly know if you’re moving forward or backwards. You can’t measure or manage what you can’t see or don’t understand. This one even applies to those of you who pay your credit card debt off in full each month!
I acknowledge there is good debt and bad debt, but credit cards well and truly fit in the latter category. If you have credit card debt, trying to get ahead financially is like taking 2 steps forward and 1.5 steps back. This becomes exhausting and means you’re working hard each day to ultimately make a bank, airline, supermarket or department store rich, rather than yourself!
So please; if you have a credit card debt, do whatever you can to eliminate it ASAP. If you can’t afford to live without a credit card, the chances are you can’t afford to live life the way you’re living it. Like most problems, the best time to stop this mess was yesterday. The 2nd best time is today.
If you’re struggling to get on top of this, reach out to us. We’d love to help.