Credit Cards

The Cautious Debtor uses credit cards wisely.

While credit cards are a convenient way to pay for purchases, they do come with several dangers:

  1. Overspending.  Studies have shown that credit card users tend to spend more than cash users for the same items.  This is because there is a psychological difference between using a credit card and paying with cash.  Paying with cash tends to make the purchaser more aware of how much is being spent.
  2. Monitoring.  Unless we download or monitor transactions regularly, we have no awareness of how much we’ve charged until the next statement arrives.
  3. Identity theft.  No one’s identity was ever stolen based on a cash purchase!  While brick-and-mortar retailers and online retailers alike take extensive precautions to prevent hackers from gaining access to private information, no security is perfect.  Several high-profile cases of information theft have been in the news the last few years; each of these carries the potential for identity theft and credit card fraud.  Even ATMs and gas pumps are not immune.

Credit cards can make us think we have money that we don’t actually have.  To avoid getting into trouble with spending using credit cards, follow these three rules:

  1. Use credit cards only for budgeted items.
  2. Pay the balance in full every month to avoid interest charges (which you probably haven’t budgeted)
  3. If you violate rule one or rule two, cut up your cards.

The credit card business is a profitable one, and many retailers now offer their own credit cards with incentives (such as an initial purchase discount) to sign up for their card.  These incentives tend to lure buyers into purchasing more than they had originally intended to (violating rule 1 above!).  Further, because of overspending on these purchases, buyers often do not pay off the balance the first month, and as a result incur interest charges that may more than offset any “savings” from the purchase incentives.

Here are a few tips for wise use of credit cards:

  • Have only one card (maybe a second as a backup).  Avoid retailer-specific cards that can only be used at those retailers, as these tend to increase the number of cards without adding much flexibility.
  • Be careful not to go over your credit limit, which incurs fees.
  • When possible, use a debit card rather than a credit card, since this can be tied directly to your bank account and can help you keep track of your purchases.  (Note: debit cards can be processed as credit cards, which is more secure than using your PIN.) If you don’t do this, then deduct each purchase from your checkbook or electronic register as you go, to enable you to track purchases against your bank balance.
  • Beware of “credit-card-like” payment options that may effectively increase the number of cards you have and make it harder to track all of your purchases.  The credit business is a profitable one for creditors, so options such as PayPal, Apple Pay, and many others try to make it easy for you to purchase.

Online Payments and subscriptions

A special case of credit card usage is becoming more and more prevalent: online payments and subscriptions.  Track these carefully and make sure you are really using everything you are subscribed to.  A couple of key tips to keep in mind when making online payments or signing up for memberships or subscriptions (such as Amazon Prime, etc.):

  • Never make an online purchase over a public wi-fi network.  This greatly increases your chances of your credit card information being hacked.  Wait until you are home or connected to another secure network.
  • Make sure that all your memberships and subscriptions are included in your Spending Plan.  It’s easy to lose track of these and end up spending more than you realize.

Activity: Credit Cards

We’ll focus on debt repayment in the next topic.  But for now, if you have outstanding credit card debt, identify and write down one action step you want to take regarding your credit card debt and a date by which you will take that step.  If possible, identify someone to hold you accountable for the action you identify.