crazy and mean

The greatest determining factor in your wealth is your mentality. Your perception of money and your personal traits that drive how you use money make up your money mentality. Whether you make a lot or not, the end result is how you think about it. Because of this, I’m general against credit, and most definitely against credit cards. While credit is a great tool for buying a house or car, it’s a terrible tool for almost everything else, and the kind of credit we use for everything else comes from credit cards.

Credit cards are bad. Evil almost. Most people will disagree with me on this, but most people shouldn’t use credit cards. You should have credit cards because that helps your FICO score (and down the road a good FICO score helps get you better loans), but unless there is an emergency and an immediate need that only a credit card can fill, don’t use them. There are two reasons for this, 1) it works against human nature, and 2) it can be very costly to use and can do a lot of damage to those who misuse it most.

Plenty of people will have no problem managing their credit, and credit is useful to many types of people. However, even if you don’t get into any trouble using credit cards, and always pay the max every time, it’s still doing you harm. In the day and age of debit cards, there’s no reason you shouldn’t have one, and no reason that shouldn’t be your primary card.

Credit, especially credit from a credit card, works against human nature in a few ways, but the worst, and that which affects even those who use it correctly, is its effect on the value of money and your mental awareness of your spending habits. Paying using credit from a credit card – now – means you pay with your own dollar…later. Assuming that you always pay your bill in full and don’t incur any interest payments, this might seem like a great asset. However, we as humans are already terrible at understanding the future value of most anything, and especially that of something as intangible as the future value of a dollar. If we were better at this, then we’d be much better savers and investors, but we’re not and hence we’re somewhat bad savers and investors.

The mental price of saying to yourself, “I’ll put this on credit and pay it when the bill comes in at the end of the month,” is more likely to cost you in the long run as it lets you delay the full mental impact of the cost while giving you the full mental benefit of the purchase. Even such a seemingly short amount of time as until the end of the month can cause you to spend more when you don’t need to. The solution that people have come up with to moderate this natural human desire is the horrible practice of budgeting. If only you can create a solid budget and follow through on it you could keep your urges under control, or so you tell yourself. There’s no need to pay that price, and additionally, completely miss the true value of budgeting (what’s the true value of budgeting? – that’s for another post).

Now so far, we’ve only considered those who can successfully use credit cards. What about those who misuse it? If you go without paying the full amount of your bill, then you are falling for second true evil of credit cards. High interest. If you can’t buy something today with the money you have, then wait until you have the money, or get a real loan. At the worst, if you have to use credit cards to pay the rent or electric bill then you’re in really deep shit (oh yes, this can be done). Of course, there will be exceptions that are justifiable, but many of those in the worst situations have fallen to the worst evil of credit as already mentioned which is a distortion of the value of money that causes us to be such bad savers and investors to begin with.

What most people don’t consider is that credit from a credit card is a loan and one with a very high interest rate. When you pay $8.53 for lunch on your credit card, you’re taking out a loan for $8.53 with 18+% interest. If this isn’t paid in full, then you’re paying the interest on that loan for your lunch. There are enough people piping in about how paying only the minimum or anything below the full amount is a terrible idea, and they always like tell you how much a $20 pizza costs if you only pay the minimum. Good, I’ll skim this part then, but quickly, not paying the full amount is probably more expensive than you realize. Doing the math might help you realize this, but the problem is probably bigger than a math equation, and fixing your money mentality is a personal choice. The situation, of course, isn’t helped any by credit card companies and banks offering them, but a discussion on the ethical practices of such organizations is for another time.

What should you do instead?

My advice, and this isn’t for everyone, so consider your own unique situation, is get a debit card if you don’t already have one, and use that as your primary card. Some banks charge to use the debit card as a debit card (entering your pin instead of signing), in which case, you should swipe it as a credit card and just sign your name. Banks are dropping these charges, so it shouldn’t be hard finding one that doesn’t charge you. If you use your pin, then the charge will go through immediately if you have the funds. Otherwise, if you sign, it’ll go through when the store processes the receipt, a couple days later usually, and you won’t receive a bill with all your charges on it that you then write a check for. Either way, it’s near immediate payment, so you’re forced to feel the full mental weight of the purchase.

If you’re used to getting a bill with all your charges, then you might be used to reconciling your purchases using that statement. Now that you won’t be getting this, you should use your regular bank statements, and preferably, you’ll have online access, and you can review your bank account regularly to see how you’re spending your money and whether or not you actually have money to buy stuff with.

You hopefully do more then just read over a piece of paper or check a website when considering your finances. Tracking your spending habits is great, but without any planning, it’s almost completely useless. If all you’re doing is keeping yourself from spending all your money each month, then you’re digging yourself into a hole for the future. I don’t recommend budgeting, but all of the good tools (good in that they work, but honestly they all suck) available today work around basic budgeting concepts, so do what you have to for the time. I’m attempting to innovate, and will hopefully add another option to the personal finance tools that’s much simpler and less time consuming (and much less painful) then using current applications. Until then, you may just have to get by on your own imperfect system (reference: Be the best B student).

Successful Financial Goal Attainment: Perceived Resources and Obstacles [PDF]