An available balance on a credit card is not a licence to spend that balance on whatever you want.
It is simply an option to borrow money.
When you borrow money, you have to pay it back, plus the cost of the interest, over time.
When you borrow money, you should always have a plan to pay it back.
Credit cards make people lose their minds.
BEFORE CREDIT CARDS:
Consumer: “I want that thing.”
Store: “Ok, can you afford it?”
Consumer: “No I don’t have enough money in the bank to buy that.”
Store: “Then you can’t have the thing.”
Consumer: “Ok, I suppose I don’t really need it.”
AFTER CREDIT CARDS:
Consumer: “I want that thing.”
Store: “Ok, can you afford it?”
Consumer: “Yes, because the credit card company gave me a $5,000 credit card I can pay for it, even though I don’t have $5,000 in the bank.”
Store: “Great! Here’s the thing you want. Any idea how long it will take you to pay off the credit card balance?”
Consumer: “Who cares, and none of your business.”
Credit cards enable people who can’t afford something to buy that thing they can’t afford.
On the surface it sounds like a good thing, doesn’t it?
If it’s something you really need, like some new clothes for a job interview, which you will pay for after you get the job, fine. In that case you have a plan to pay it off. Or at least you have good intentions.
But the reality is that many people buy things without any plan but to pay the minimum payments and whatever interest is required by the credit card companies.
These are really bad habits to build, especially when you are young and managing your personal finances for the first time.
Your extra money is now going to credit card interest and paying the minimum amount for something you probably didn’t even need at all.
If you lose your job, you will be stuck with these payments and no savings to fall back on.
People don’t see the value of savings until bad things happen and they have to turn to more credit, payday loans, and eventually bankruptcy.
I’m telling you right now – it doesn’t have to happen this way!
I hear this story all the time and people act like it was inevitable. Like this was always the trajectory of their life and there’s nothing they could have done to stop it.
I’m going to share some facts with you that are obvious when you think about them, but as obvious as they are, people ignore these obvious facts on a daily basis, which leads them down the path to crippling debt.
Obvious fact #1: You can’t spend money you don’t have.
If you don’t have something, it doesn’t exist.
You can’t spend money that doesn’t exist.
Ah, but credit cards make it seem like we have it.
When you buy with a credit card, to quote Robert Brown, author of Wealthing Like Rabbits, you are “borrowing money”, not spending it.
Here’s the breakdown:
You are effectively asking the credit card company to buy something for you just like you asked mom to buy you ice cream when you were 7.
Mom would always say “OK” but that it would come out of your allowance. But it probably didn’t, did it? Mom was being nice and didn’t make you pay for the ice cream you borrowed from her.
Credit card companies are not your mom and you are not 7.
Just stop it with this borrowing nonsense, ok?
You want something? Earn the money first. This is what grownups do. You save the money until you can buy it. Stop being a child and stomping your feet and saying “But I want it now!”
If you do have the money and then you want to use a credit card to pay for it and get rewards, I don’t have a problem with that(sorry Robert) – if you pay it off that day. Or at least that week. Before the interest starts.
Obvious fact #2: You don’t need stuff you don’t need.
This one seems even more obvious doesn’t it?
If that’s true THEN WHY ARE YOU BUYING STUFF YOU DON’T NEED.
Scenario: Your TV is broken and you need a new one.
You may WANT the new 4k curved 60 inch TV for $4,000 but because you are a normal person with normal eyes that can see smaller screens and still enjoy what you’re watching you DO NOT NEED A $4,000 TV.
But we get confused with wants and needs, don’t we?
The TV example might be obvious, but it’s a little trickier when it comes to things like quality clothing or organic produce.
Quality clothes last longer, so spending $100 on a shirt is totally worth it, right?
Maybe try a $10 shirt first. If your life is ruined and you end up on the street because of your poor choice in cheaper clothing, then go ahead and buy the longer lasting shirt.
But this probably won’t happen. You’ll probably be just fine with the $10 shirt. And maybe it won’t last as long as the $100 but you can buy 9 more shirts with the money you saved.
You don’t need the $100 shirt. I have t-shirts that cost me $10 and I’ve been wearing some of them for over 15 years.
Do people laugh at me on the street? Maybe, but not because of my shirt – they have no idea how much my shirt cost. They don’t care and neither should you if you can’t afford it.
Organic produce is better, right? Probably true. But if spending $8 on a green pepper means you have to go get a payday loan, maybe you just don’t let the pepper ruin your life and buy one for $2 instead? Or don’t eat peppers for a little while. Have you heard of carrots? You can get a whole bag for $1. There will be a time in your life when you will be able to afford as many organic peppers as you like, but if that time is not now, you will survive just fine.
Whenever you buy something, just please, stop and think. Weigh the pros and cons. Buy things you actually need, with money that you actually have.
Obvious fact #3: you are not invincible
“Why should I save my money when I can just make more every 2 weeks.”
Sure, you’re awesome at working. You’re going to work until you’re 85 years old.
Because you’re tough and you make your own decisions. Nobody tells you what to do.
Well, good for you. And honestly, I hope you’re healthy and able to work until you’re 108 years old.
But what if you’re not?
For argument’s sake, let’s say you are the most careful person in the world. You take care of your body and your mind. You are doing all the right things, all of the time.
Guess what? Cancer doesn’t care about how awesome you are.
That drunk driver that crashed into you didn’t stop to consider whether you would want to have use of your legs past the age of 50.
I was addicted to gambling for years and it took me a long time to work it out. I lost a lot of money during that time and basically went bankrupt. My credit rating was ruined and I had no choice but to live on cash for years. I didn’t buy anything with money I didn’t have because I couldn’t. I had no credit. Going through that is what taught me the value of tracking my spending.
Stuff happens and you can’t control it.
Physical and mental injuries are common.
You could get fired and it could take 6 months or more to find yourself a new job.
Any of these things could happen to you.
But if you have nothing saved and are in debt – for no good reason – and then something happens to you, even if it’s temporary, you’re in big trouble.
Credit cards and lines of credit are not helpful when things go wrong. Because now, guess what? You’re sick, with no ability to make money and now you have to make monthly payments that you can’t afford.
I honestly hope nothing happens to you, but I’m not going to lie to you and tell you it’s not possible. We all think this stuff happens to other people until it happens to us. And wouldn’t you rather be glad that you didn’t spend all your money on crap you didn’t need and instead put a little bit away in the bank for the future?
IT’S NOT EASY, I KNOW
So it turns out that things that seems really obvious to everyone, float right out of our heads when we are making decisions about spending money.
All I ask is that when it comes down to making a purchase, and you don’t have that money sitting in your bank account, please go read the obvious facts above and then make the decision with full awareness about what you might be getting into.
I’m not saying you can’t have nice things, or things you want. I’m just saying that you don’t have to have everything NOW.
Credit cards spoil us in the present at the expense of our future selves.
Do your future self a favour and stop spending money you think you have on things you think you need.