Should you use Credit Cards?

If you ask someone “What’s a bad thing to do financially?”, there’s high chance they’d say “Credit Cards”. I’ve seen people who do downright stupid things with money without involving credit cards still say, “Credit Cards” are bad financially 🤣

They are correct in a way but not entirely. Bad financial decisions stem from lack understanding of finances and bad decision making. A Credit Card is just a tool you use. That said however, credit card companies do have a careful system which lures people in and slowly in-debt them. It’s better to be informed about this system before you get on board. I had some idea of this before getting into credit cards. But it’s really after a year or so I understood about the real scale of their system.

Well, let’s look at some Pros and Cons of using Credit Cards. We’ll look at different features of Credit Cards and the Pros and Cons attributed to them. And yeah Cons really outweigh the Pros🤣 But if you are smart you can still get some benefits from them.

Credit Card Discounts

Credit Card companies normally have partnerships with major retailers, supermarkets and filling stations. And sometimes they have seasonal discounts with many vendors. This is not a bad thing right? Well it’s not. You can get good discounts by using credit cards for payments that you do anyway.

The catches start when there are tricky purchase amount limits for the discount to be applied. So then you might need to spend a bit more to get that discount. That means you’ll have to buy some things that you didn’t really plan on buying. This is how the Cons start to surface.

The next thing you’ll do is, you’ll get in the habit of looking at Credit Card promotions regularly and then dropping by shops just because they have the discount there. This is when the Credit Card company start to get you. This is the point that they tap into your spending habit. They aren’t necessarily trying to in-debt you in one month. They are making you a lifetime over-spender. And overspending habit really builds on. Once habits are made it’s very difficult to change them.

Credit Card Cashbacks

A cashback is when the Credit Card company gives you back a certain portion(ex:10%) of the money you spend at selected vendors. Normally they include telecommunications service providers, utilities, supermarkets and fuel. Normally the only condition here is you have to spend a minimum total amount per month for this cashback to apply.

I think this is a great way you can benefit from credit cards. The payments outlined above are payments you do anyway because they are essential goods and services. So you can add up what you would normally spend on these for a month and see if it matches with the minimum spend requirement. If it is then this can save you a good amount in a year.

For context here are some numbers. Last year I used my credit card to spend for my essential utilities and groceries and got a cash back for around 20,000 rupees. You must have 250,000 invested at 8% to get that return. And with the conditions last year(2020) a realistic return for traditional investments like the money market was at like 5%. In that case you need 400,000 invested initially.

These are not big numbers when you get wealthier but when starting out it is actually an okay benefit.

But if you have to deliberately spend more money just so the cash back will apply, you’re wasting your money now.

Installment Plans

Installment plans are a blade that cuts both ways. You could get something you really want at 0% interest and distribute the payment to 12,24,36 months etc. You can leverage your future income to make the payments. This is also not that bad initially. Only thing is you take up a bulk credit amount at once here. Though you see only one installment every month you have the full amount of credit under your name until all installments are paid. It’s literally the same as a normal loan.

And this installment payments are also addictive. It’s easy to get a bunch of stuff on installment plans. After all it’s a very small amount distributed over 36 months right? However, if do 3 or 4 of these don’t be surprised that now you are obliged to pay around 25% of your salary for the installments every month.

And the best thing comes now. Once you opt for the installment plan in you’re mind you’re committed to the credit card for 24,36 months or even more. I’ve seen installment plans for 60 months even. Now the company has successfully gotten you on board for 2 or 3 years. That means more and more spending is on the way for you. And more room for you to make bad financial decisions.

Credit Card Points

This is fairly straightforward. The more money you spend the more points you earn. Nothing much to say here than it’s a useless benefit for you overspending. These benefits have different branding but they’re all the same and are all useless.

What are the Normal Costs when using Credit Cards?

1. The Annual Service Charge – They might waive it off for a couple of years sometimes and sometimes waive it off lifetime. Lifetime annual charge waived off it an okay deal if it’s combined with a good cashback program.
2. Late payment penalty – If you don’t make the minimum payment on time you’ll get charged a big penalty.
3. Interest payments – If you make the minimum payment but don’t make a payment above the last statement amount, then an interest payment will be applied on a daily basis until you pay the total statement amount.
4. Stamp Duty Fee – These are applied when you make a payment to international vendors. So your monthly Netflix and Spotify subscriptions come with these fees if you use a credit card. Stamp Fee is normally 2.5% of the payment. And when you use your credit card internationally it will also have the stamp duty fee.

Final Thoughts

My opinion is that credit cards are the gateway drug that create the ultimate addiction that destroys your wealth; overspending. So if you’re someone who’s not intentional about your actions and someone who’s a bit too invested in the feel-good life, better stay away from credit cards because it has a good potential to send you down the path of financial destruction.

But if you’re an intentional person with reason you could experiment with Credit Cards and see what benefits you can get from them.

Dave Ramsey is the best person to teach you about this topic though 🤣
If you don’t know Dave Ramsey you should click here right now.

Hope you found this interesting. I know it’s a well written over topic but I feel my take on “credit cards as a gateway drug to the ultimate addiction of overspending” is something a bit different.

You can check out my post on managing your monthly finances here if you haven’t already. I highly recommend that article.

Enjoy your wealth building journey!!!!