Friday, May 10, 2013

5 Reasons Why You Should Avoid Credit Cards

There's no free lunch and only one way to create wealth i.e. to produce more than you consume. A credit card assist you in doing exactly the opposite. 


1. You spend more when you use credit cards. The psychological impact of dollar bills leaving your hand is more potent than swiping and signing a piece of paper to complete your purchase. 
This occurs because it easily facilitates the deferring of pain to a later date rather than enduring the pain / loss of resources right immediately. In fact a study of credit card use at McDonald’s for example found that people spent 47% more when using credit instead of cash. This is money you could have saved!

2. Most card holders do not pay their credit card bill on time thereby incurring massive interest rates and fees for late payment. Interest rates can range from 18-25% per annum or more. This severely eats aways at your limited resources.

3. Rewards Programmes Aren't Worth It - Think of it this way, banks would not offer these programmes if they were losing money. Frequent flier miles and the like upon further analysis isn't that attractive. For the privilege of being in the programme you must pay a yearly fee. For lower income people especially to accumulate enough points or miles for a significant reward would require years of membership even while you pay yearly fees.

Moreover reward programmes are subject to:

Capacity controls - only limited number of seats on a given flight are allowed for redeemers of miles. 
Space availability - often persons, travel agents or insiders book space way in advance leaving other members wanting. Consequently to actually book a flight you may want requires you to book sometimes 3 to 6 months before hand, with penalties if subsequent changes are needed. 
Blackout dates - popular traveling dates that are typically not allowed.

4. Credit Cards Will Ultimately Reduce Your Credit Worthiness - Cards are often sold as a good way to increase your credit worthiness in case you would like to take out a loan in the future.The banks therefore want you to borrow money and pay them back regularly to prove that you can borrow and payback money well. Ironically not having a credit card ensures a more favourable financial future. Having a sizeable cache of saving, a steady job and no debt actually makes you more bankable.

5. Rewards encourage further spending / debt. The real reason banks offer these reward programmes is two fold. 

a) to encourage spending and debt thereby increasing their interest charges, late fees and penalties
b) to encourage purchases at a particular programme partner. Overseas travel, shopping privileges etc. Ironically all these work against the individual in practicing frugality and perpetuate the cycle of debt.


"Spending More Doesn't Make You Save More"

A Final Word

If you have to use plastic for travel, convenience or ordering items online, you should opt for an international debit card or prepaid card. With that arrangement you can only spend money you have not money you don't have. The emotional feel of your wealth depleting will also be registered more using a debit card or cash.

To increase your wealth you need to either make more money or eliminate things that make you spend more. You do not build wealth with credit cards. Think about it. The credit card industry is a very sophisticated multi-billion dollar industry and you aren't going to beat them at their game. 

3 comments:

  1. I understand your points but I think these should serve more as a guide for people to decide whether they should use credit cards and if they have them, how they should use them.

    I think that people can train themselves to use credit cards differently. I think that society puts pressure on people to spend and many people don't develop the skills needed to make good decisions about spending, whether they are handling cash or a card.

    If individuals learn to put a limit on their credit card, just as they would with cash, they will develop a habit over time that prevents unnecessary spending.

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  2. I agree with the person who responded on your comments. This should be a guide on what could possibly occur. Your first point of spending more is not valid. Should KFC close down their business because people get overweight from eating it. That issue relates to a consumer being unable to properly have self control and it is therefore the consumers' responsibility to determine how much they should spend. When someone spends money they get a product or service of value - they do not receive nothing.
    Your second point regarding repayment of timely payments to credit card - Trinidadians pay their loans and mortgage on time - why should the credit card be any different ? Financial institutions now have several methods - telephone banking, atm, internet, via standing order and also in person. You also have the option of paying off the monthly limit completely to avoid paying interest and could have up to 50 days interest free if you know how to calculate your billing cycles on transactions.
    Point 3) Your points are on one type of reward card and it appears that you have not looked at the various institutions within Trinidad. Both Scotiabank and First Citizens offer a card with no BlackOut dates and the time period for booking is 14 days in advance. As with all travel agencies you need to book in advance to get a flight. No one will keep a seat for you until the flight date in the hope that you will use your points to fly. First Come First Served.
    4) This is a very incorrect statement. - Whilst all the points you made do significantly contribute to your credit rating; there are other factors involved such as credit history. Credit decision makers use past and present history as a risk management tool. Whilst having no credit might not deny you a credit approval it can reduce the amount you can borrow Whilst good credit borrowers can obtain 100% financing for vehicle loans for example a person who never had credit might have to make a down payment of 10-20% as they are unproven.
    5) Just a reminder - a Bank is there to make profit. I personally will not invest in an institution or an individual that does not try to be profitable. Anyone who sells a service or product are in it to make profit. We as consumers have to determine if the cost of doing business with that institution is worthwhile. My recommendation - change your outlook and remove the emotion and purchase some shares into these obviously profitable institutions. As a shareholder and someone who will gain profit you can either accept the gains or make recommendations to have proper changes to the system.

    Best Regards

    ReplyDelete
    Replies
    1. Good comments....... note the article is a word to the wise. Everyone should be allowed to make their own decisions and suffer and /or benefit from the consequences.

      The article's intent is to educate and edify so that the reader can make more informed, beneficial decisions regarding their personal finances.

      P.S. in my assessment there are a lot more attractive investment options than the local banking sector....

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