I haven’t written a post for my series, “A Family Guide to Living on Less” in a while, so I thought it might be time! If you haven’t read the first three posts, check them out here:
photo credit: The coca-Cola company
Most Americans view credit cards as a child sees Santa Claus. The child enjoys the presents without realizing their hidden cost, and today’s adults use the credit cards to provide instant gratification, deliberately ignoring the fact that the purchase isn’t affordable and wil ltake a while to pay back “on time”. The multibillion dollar credit card industry thrives on people’s willingness to pay 18-21% interest on short-term debt.
Your precious credit cards provide tantalizing temptations. Credit card companies don’t give you a shovel to dig your financial hole; they’ll provide a backhoe so you can dig deeper and faster than ever before!
You can take cash advances on your credit cards. Pull out the cash, pay your bills, run the card up to its limit, then start on the next card. Pay the minimum due each month. There are no forms to fill out, no loan approval committees to pass, no definite schedule for repayment.
However, do this for a few months and you’ll end up so far in debt you may never get out. The road to bankruptcy is paved with credit cards. It’s a lot like a playground slide, effortless to go down. Have you ever watched a toddler take his first solo trip down the slide? The shrieks of delight turn to cries of pain when he flies off the bottom and smacks his rear on the playground surface. Use your credit cards in this manner and your fate at the bottom is the same as his. It’s unbelievably painful.
photo credit: American Playground
Save credit cards for emergencies only. Emergencies are like your child needing to be hospitalized before your new medical insurance policy begins or when you have an unexpected car repair that is absolutely necessary. If you use your credit cards indiscriminately, they may not be there when you most need them-they’ll already be at their maximum charge limit.
There are two other reasons why you shouldn’t take cash advances using your credit cards. One is the interest. No other legitimate lender of money is allowed to charge the rates charged by credit card companies. These companies then go further by adding exorbitant late fees onto their outrageous rates if you are even one day late paying your minimum balance. In addition, interest on cash advances applies the moment you take the advance, there’s no grace period here, an it is tacked on immediately everything you have charged that month. You’d have to go to a pawnshop or a loan shark to find a worse deal.
The second reason you should avoid taking cash advances on your credit cards is in the event you have to declare bankruptcy. Most states exempt from bankruptcy protection any credit card debts incurred in the six months before your bankruptcy filing. You may even be charged with bankruptcy fraud, especially if you’ve run up big debts and purchased items considered to be luxuries.
photo credit: For Cash Advance
Credit card usage is too easy. It’s much too tempting to use them to maintain your old lifestyle, keep up appearances, or purchase the expensive goodies you miss so much. These things can “slip in” while you are convincing yourself that you are only paying for the necessities.
Dig deep into yourself, locate the common sense, maturity, and self-discipline you know you have. Put the credit cards aside and really work at solving your financial difficulties without using them. You may very well need a loan, but any loan at conventional rates is better than the interest rates on credit cards!
The next post in my series, “A Family Guide to Living on Less” will be “Not by Bread Alone: Cutting Back on Discretionary Spending“.
**This article was featured in the 152nd Carnival of Debt Reduction.**
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Francois
08.07.08 at 9:00 am
Hi Anna
I agree with you. I have some friends who do exactly this.
They have a credit card with a large credit limit. However, they never use it. It is there simply for an emergency, e.g. if someone needs to go to hospital urgently.
I also encourage people to save up a “freedom-buffer”, once they’ve paid off most of their debts (see stage 3 in this article).
If you a buffer like that, you can do away with your credit-card altogether.
Take care & keep up the good posts,
Francois
Anna
08.07.08 at 11:51 am
A buffer is a great idea! Although, isn’t it important to have at least one credit card in order to have a good credit score?
livingalmostlarge
08.07.08 at 4:41 pm
I use a credit card for everything. I think the first line of my post here http://www.livingalmostlarge.com/2008/08/05/frugal-tip-use-cc-to-buy-gas/
explains it all. I like CC to guns and I think it perfectly matches the analogy.
Better yet I’ve earned $1k in cash back credit card rewards between May 2008-July 2008 from charging my DH’s tuition. I will never let go of my CC.
Anna
08.07.08 at 6:36 pm
I think everyone should have a credit card, IF they can handle it properly and responsibly. Thanks for the link, I’ll have to read that post.
Francois
08.07.08 at 8:09 pm
Hi Anna
I don’t know much about credit ratings, but why does one need a credit rating if your goal is to be free from debt?
I must admit though, I’m a bit of a hypocrite, because I have a credit card and I make most of my purchases with it.
But in the same breath:
1. It’s not safe to carry large amounts of cash around in South Africa,
2. I pay my credit-card balance in full at the end of every month,
3. I have no other debt, and the only debt I could see myself wanting to make is if I want to start a business or something like that.
I don’t think I’ll have much of a problem obtaining a loan for starting a business, as long as I have a solid business plan.
Does a credit rating play a major role in the USA?
Francois
Anna
08.07.08 at 9:03 pm
In the US you need to have good credit in order to get a loan, for things such as a mortgage, a car, etc.
I guess if you own your house and car, etc. then a credit score wouldn’t matter all that much.
You write very thought provoking comments!
Francois
08.08.08 at 11:33 am
Hi Anna
Why thank-you. I was afraid of coming across as arrogant!
But I really just don’t like debt. I’ve seen it trap so many of my friends, and keep them from living their dreams.
Debt is almost like dog-poo. It takes a second to step in it, but getting all the little bits out of your shoes take ages!! And even after that the smell still lingers around for a while…
If a credit score is a requirement for getting a mortgage to buy a home, then I suppose if you want to own your own home then it’s a necessary evil.
But there are also other ways you can own property without having to make debt.
E.g. buy shares in a publicly listed company that does property development, or owns a lot of land. You can save up and buy your shares in small amounts.
And for a car, if you’re willing to settle for driving something cheap, 2nd hand and small for a few years, you can save up for your next cars and buy them cash.
Hope you have a good weekend
Francois
Anna
08.10.08 at 6:45 pm
Not arrogant at all. There certainly are ways to have a home and a car and other things without having to get a loan, but Americans like instant gratification!
My husband owns his truck and once my car is paid for, we’ll keep our current vehicles until they no longer run.
We also are halfway done with our mortgage, and our hope is to use the money we get from selling it to buy another house.
I agree, debt is like dog-poop! Did you read the article, 6 Financial Lessons Learned From Going Poop It’s hilarious!
Francois
08.11.08 at 6:17 am
Anna, that article is simply hilarious!! And such a good analogy of the truth!!
You guys are definitely on the right track with your thinking! I’ll be following.