May 2, 2007

on credit cards

Posted in credit cards, money, newspaper, opinion column at 8:01 pm by weiszguy

My column from the May 2 edition of the Greenhorn Valley View:

Are credit cards a good thing, or a bad thing? The debate has raged for decades, and doesn’t look to be letting up anytime soon. On one hand are those who have been burned by credit cards. The ease of payment, the minuscule monthly minimums, and the feeling of status and power that credit cards bestow has caused many, many people to abuse their cards and financially overextend themselves. On the other hand are those like the concept of credit, in general. They say that our lives are richer and fuller than they would be without easy access to credit. It only costs a few bucks a month to dramatically extend our purchasing power.

But let’s think about that for a minute. Say I want to buy something that costs $1000. I don’t have the cash to pay for it, so I charge it on my credit card. I’ve magically increased my purchasing power by spending money I didn’t have before! But now I owe $1000 to my credit card company, which must be repaid. I decide to pay the company $100 the first month, which drops my balance to $900. Now I can spend an extra $100 and not be any worse off than I was before. But this hasn’t really given me more purchasing power, other than the initial $1000 I spent. I sent $100 to my card, and I charged $100 to my card, but I could have achieved the same effect using cash, and the interest on the $100 would have stayed in my pocket.

Well then, couldn’t I increase purchasing power by spending more than I pay off each month? Yes, I could. Now let’s say I paid $100 toward my $1000 debt, leaving me with that same $900 balance. If I spend $150 this month, I have indeed increased my purchasing power. That extra $50 is money I didn’t have before, and wouldn’t have been able to spend if not for the credit card. Every month that I charge more than I pay off is a month that I increase my purchasing power.

But this pattern of spending cannot continue very long. Eventually, I’ll have a monster of a balance, a sharp increase in minimum payment, and a maxed out card with which I cannot continue to increase my spending.

Had I used nothing but cash, however, I would only be able to purchase as much as my income allows. And in exchange for the perceived lesser amount of purchasing power, I would owe nothing to anybody, I would not be bleeding cash each month in the form of interest charges, and I would have learned to be content with my income-supported level of spending.

Is that kind of peace-of-mind worth anything? I say it’s priceless.

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