5 Reasons Why There Is No Right Way To Use Credit Cards
By: Shubham Pathania
Tags: Finance, Credit Cards, Money, Financial Literacy, Life Lessons

5 Reasons Why There Is No Right Way To Use Credit Cards

Counterintuitive advice for people seeking financial freedom.

Photo by Jakayla Toney on Unsplash

Many finance gurus already preach to avoid credit cards. You might have heard this bazillion times on the internet. Have you ever thought about what could be the possible reason that so many people advice to stay away from these cards?

Let me first tell you it has nothing to do with your spending habits. People often say that if you plan a budget and stick to it, then credit cards are beneficial. In fact, many financially literate people regularly use it.

In this article, I am going to tell you why there is no right way to use a credit card. Things I will be mentioning are already in front of us, but still, people refuse to accept them.

Let’s take a closer look.

1. ‘Credit’ in credit cards

In layman's terms, a credit card is a mini-loan bank on your go-service. These marketing strategies came up with the word ‘Credit’ as the word ‘loan’ makes people a little uneasy.

As per statistics, 70% of the United States population carries a credit card, with 34% of Americans carrying 3 or more cards. Why do so many people need loan cards despite earning good enough?

The answer is pretty simple.

People often try to reason their wants with their needs. Credit cards make it easier for them. Not even 10% of people utilize their cards for genuine needs. It is all spent on shopping, coffees, iPhones, and other fancy stuff.

Credit card companies make the bulk of their money from three things: interest, annual fees charged to cardholders, and transaction fees paid by merchant businesses that accept credit cards.

2. Credit card — Psychological effect

Studies have shown it’s psychologically easier to overspend with credit cards. The act of swiping a credit card is mindless: swipe, sign, and you’re done. Paying with cash, on the other hand, can be a little more painful.

An experiment done in 2000 by a team at MIT really stands out. They asked students to bid on Celtics tickets, Red Sox tickets, or a consolation prize of a Celtics or Red Sox banner. They would be expected to actually hand over the money for these items later, therefore it wasn’t about what they had on them at the time.

On each of the items, the students who were told they could only pay with a credit card were willing to pay significantly more than those who were told to pay with cash. For example, students were willing to pay an average of $60.64 for Celtics tickets with a card but would only pay $28.51 in cash — that’s a 113-percent ‘credit card premium’.

3. Credit card and Reward points

There are many lovers of credit cards in the market despite studies showing the overspending effect of it.

One of the other popular ways these companies trick customers is with their Reward Points Program (RPP). Credit cardholders believe they are getting benefits from purchasing goods & services with their card. But in reality, they are making most of these purchases for the sake of reward points, which they can redeem later.

Think of all the time you spent in their reward points section to redeem items. These financial institutes psychologically trick people into unnecessary spendings.

4. Better replacement of credit cards

The actual reason that can be debated for the use of credit cards is an emergency. An emergency can be of various types like job loss, medical, unseen expenses.

There is a better way to fight such emergencies instead of having a credit card. Firstly, you should have yourself and your family members covered under a good health insurance scheme.

For other emergencies like job loss, it is important to build a corpus equivalent to your six months of expenses. This can be your emergency fund. It will help you to stay afloat during tough times. The pandemic has shown us how important it is to have an emergency fund.

5. Warren Buffett on credit cards

Legendary investor Warren Buffett advised people to avoid using credit cards. Recalling a discussion with one of his woman friends, who came for his advice on what to do with the money she had. Warren Buffett asked her what she owes to her credit card?

The interest rate the woman was paying on her credit card was around 18%, recalled Buffett. He replied to the woman — I don’t know how to make 18%. If I owe money with 18% interest, the first thing I would do with any money I have is to pay it (credit card due). It’s gonna be way better than any investment idea I have got.