Is Everything Good Also Bad? It is always amazing to me how two different people can make equally compelling arguments for completely different points of view. For instance, many say that the gas powered engine has been man’s single greatest invention serving as the catalyst for trillions of dollars in economic expansion. On the other hand, critics argue that this same invention is the single greatest source of environmental pollution. A simple search of the internet though results in a fairly compelling argument from the opposite point of view. In his book “Everything Bad is Good For You: How Today’s Popular Culture is Actually Making Us Smarter”, Steven Johnson argues that those things considered bad are in many ways good for you. One example he uses is that video games are making children smarter. Studies show video games make people more perceptive, training their brains to analyze things faster. If you believe that everything good can also be bad and that everything bad can also be good, you will agree with my hypothesis that credit cards can be very good financial tools but, used inappropriately, can be very, very bad.
What’s Good About Credit Cards? Let’s begin by exploring some of the good aspects of credit cards. Credit cards are ubiquitous financial instruments. That is to say that they create a tremendous amount of flexibility and convenience. They are accepted almost everywhere things can be purchased. For me, convenience is one of the most appealing attributes of credit cards. In addition, used wisely there are a plethora of ways credit cardholders can benefit from the utilization of credit cards. These benefits come in the form of “rewards” that are accumulated in the form of cash-back rebates, airline miles, hotel rewards and points that can be accumulated for merchandise. Most rewards are accumulated at a rate of approximately $0.01 in cash value for every $1 in credit card spending. If used correctly, this “reward” will not cost the cardholder anything. There are additional attributes of credit cards that I consider to be good attributes. They can be used to make donations to affinity groups. Some credit card institutions allow cardholders to donate a certain portion of rewards accumulated to a special interest group. Additionally, credit cards serve as a very reliable source of emergency spending capacity. In the event of an emergency where some type of financial outlay must be made, credit cards can usually be used to cover that outlay. Proving particularly valuable for large emergency expenditures where cash is not readily available. I could continue exploring the good aspects of credit cards but I am confident that I have appropriately made my point.
Could Credit Cards Really Be That Bad? Let’s now briefly touch upon those attributes of credit cards that one could argue are not-so-good or bad. If used carelessly, credit cards could create the single greatest source of financial distress. Unbridled spending leads to a vicious financial cycle. This cycle involves spending beyond one’s financial means, not being able to pay off the balance of the credit card, accruing interest on the unpaid balance and making the minimum required payment by the credit cards company to keep their account in good standing. In many instances, the combination of the interest accrued on the balance with the amount of the minimum payment leads to what seems like a lifelong journey of attempting to pay off the balance but never feeling like you are making progress toward this end. In an even worse scenario some type of fee might accrue and the balance of interest accrued along with the minimum payment being made results in a phenomenon called “negative amortization”. This term is used to describe the situation where the combination of fees and interest rates accrued, combined with the minimum payment being made results in the overall balance of the credit card account increasing and not decreasing. Here again, I could continue discussing the ill effects of poor credit card management. In lieu of this though, my preference would be to move to the real focus of this article.
Unlocking The Good in Credit Cards I would like to discuss practices that should be adopted by credit card users to unlock all that is good about credit cards. 1. Only use your card to purchase those things which you have the cash to then payoff. If you need to use your card for an emergency that you don’t have the cash to pay off the balance, make sue you put yourself on a regimented budget until it is paid off.
2. Set up electronic bill pay on your primary checking account. This will enable you to ensure on-time payments every month. Additionally, you will save yourself $0.39 per month and you won’t have to worry about the anxiety of writing a check, getting it to the post office and hoping that the US Postal Service will get it to your credit card company on time.
3. You only need one credit card. Yeah, I know it is sexy to open up that wallet and flash that cowhide full of plastic. I hate to break the bad news to you but the cashier behind the counter at Walmart doesn’t care how many credit cards you have in your wallet. All that he/she cares about his/her next break is. One credit card makes managing your finances easier and minimizes the probability that you will let credit card debt take over your life.
4. Don’t ever take a cash advance on your credit card or use those ridiculous checks that they send you in the mail. When you do either of these things, interest begins to accrue immediately and there is usually some type of fee or surcharge that is automatically accrued to your account balance. If you need cash, use your ATM. If you need a check, open up a checking account. If you don’t have the cash don’t buy it until you do.
5. Credit cards want to avoid, at all costs, you from defaulting on your obligation but they like it when you carry a balance and accrue fees. As such, if your financial situation changes and you need your credit card for day-to-day expenses or you have already used it for day-to-day expenses and are having a hard time making your minimum payment, call them up and negotiate a mutually agreeable solution. Likewise, if a fee accidentally accrues, call them up and ask them to remove it. They would rather have you as a customer than not have you as one at all. Remember that credit card companies incur what is referred to as an origination expense for gaining you as a customer. They are willing to negotiate on almost anything to ensure that they don’t lose their investment in obtaining you as a customer.
6. If you like the idea of earning some type of rewards for your spending frequency, shop around. There are many, many different types of programs with an innumerable number of product characteristics. Do your research before opting for a rewards product that you think might meet your needs. When you do find a rewards product you like, do not apply for it online. Credit cards originated online are presumed by most credit card companies to be more risky and are priced with a higher interest rate and fee structure accordingly. Call the credit card company and ask them to put you on their solicitation list for the particular product you are interested in applying for. It will take some time for them to get you on the list and then for you to apply for the product but the lower pricing will be worth it.
7. Don’t ever sign up for any of the products offered as a “cross-sell” by credit card companies. They are offered via telemarketing, when you call into customer service or even as static offerings on your credit card statement and on the “bang-tail”’ on the envelope you use to mail in your payment (the little piece of paper that hangs off the envelope that usually offers you a clock radio of $29.95. These products are designed to create additional revenue streams for the credit card company. The economics of these products heavily favor the credit card company and only provide marginal benefit to the cardholder. Plus, they are pretty bad products and the quality of each leaves something to be desired. If you utilize these practices to help you manage your credit card as a financial instrument, you will not go wrong. You will come to realize that your credit card can be a tool that you use to more effectively manage your finances. As such, you will be the beneficiary of all that is good with credit cards and none of what is bad about them. For additional financial information and practical advice or for financial alternatives to credit cards, please visit our Lending Group at: Addventure Capital
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