Credit Cards

The Good

Credit Cards have become as mainstream as it gets. Who carries cash anymore? The convenience and ease of use are awesome. Year-end pdf summaries give me a nice clean overview of my spending habits and make it a little easier at tax time too.

 

I love my credit cards and all the amazing trips and experiences that have resulted from my responsible juggling of bonus offers. If you are financially responsible, spend much less than you earn, never carry a balance, and love to take free vacations then you are missing out big time if you have not jumped headfirst into the world of travel hacking. Go check out Travel Miles 101  your welcome :) 

How are credit cards bad?

The Bad

 

Credit Cards can legitimately ruin your life. They are an enabler in this world of over-consumption. It is so easy to swipe a card and deal with it later. When using plastic instead of cash it almost feels like your purchase doesn't actually cost anything at all. The interest rates these companies charge are obscene. The fees on top of the interest are ridiculous.  Balance transfers, 0% financing, extended payment plans. All these gimmicks to keep you on the hook.

 

Being buried under a mountain of credit card debt is literally one of the worst feelings in the world. You will wonder how did you get here and eventually realize that a lot has to change if you want to ever get out from underneath it. The journey out of credit card debt is slow and miserable. Hopefully that paints a picture for you. 

Here is the bottom line when it comes to credit cards: If you do not consider yourself financially responsible, if you do not have a hefty amount of cash in the bank, if you currently have credit card debt or unsecured personal loans, if you spend all the money you earn, if you have a tendency to impulse shop then you should never use a credit card!

The Ugly - How Credit Cards Screw You

On top of the crazy high rates, late fees, balance transfer fees, over the limit fees and cash advance fees

Interest-Free Period (Grace Period) - As long as you pay your balance in full every month then you will not be charged any interest on your purchases. Nice! BUT if you do carry a balance over to the next statement cycle (even if it is as little as $5) then there is no grace period on new purchases. That means you start getting charged interest from the date of the purchase. This is a big deal and makes using your card very expensive. This is exactly how your credit card bill snowballs into an unmanageable amount. Please take this one piece of advice. If you are carrying a balance on your credit card you need to stop using that card for additional purchases immediately. Stick it in your drawer until it is paid off. Use a different card if you must, but the right thing to do is stop using cards altogether. 

Multiple Interest Rates - Let's say you consolidate a bunch of debt and transfer the balance (for a 3% balance transfer fee) to your new credit card for a 0% promotion for 12 months. You start using your new card at the grocery store, on Amazon, and wherever else you buy stuff. The interest rate for new purchases is 12.99%. Maybe you also decide to use one of those nice checks that came with the card in the initial package to pay your rent that month. The check is treated as a cash advance and has a 24.99% interest rate. So now you have 3 different amounts all being charged different interest rates.

 

When you go to make your easily manageable minimum payment at the end of the month the credit card company will most likely apply your entire payment to the 0% balance and charge you those very high-interest rates on the other two outstanding balances. In fact, if you only make the minimum payment you might pay off the entire amount of the initial 0% balance transfer before any payments get applied to the higher rate balances on purchases and cash advances. Credit card companies have different ways of handling this so make sure you check the policy with your specific card. You must stop using the card if you find yourself in this very bad situation. It can bury you. 

Intro Promo Rates and Deferred Interest - You go to Best Buy to check out the newest computers and TV's. You want a new computer, but you are just checking them out at this point. The associate comes over and explains how they have an awesome promotion right now where if you open a Best Buy credit card, spend at least $2,000, make the minimum payment each month and as long as you pay the entire balance before the end of the 18 month promo period, then you will pay no interest. 

 

Sounds great... you can get the TV and computer today and then save up some money over the next 18 months to pay off the credit card. The 18 months come and go. You have been paying down the card and you only have a few hundred bucks left when the promo period ends. You completely forgot about the rules of the promo. Well...guess what. You are going to get charged a crazy high rate like 26% backdated for the last 18 months. You could owe like $900 in interest all because you did not pay the card in full before the end of the promo period. Ridiculous...So many companies offer these promos. They are very tempting. They give you permission to spend money you do not have. Don't do it.