I’ve heard that paying off credit cards is part of a good financial plan. Is this the case? Should an individual looking to build wealth use credit cards?
Thanks a lot,
Let’s talk about the credit card agreement. If you read the agreement you will notice that it talks about interest rates, late fees, and yearly fees. You will first note that the actual rates that will be charged will never be disclosed, but rather linked to some other interest rate like the prime rate. The reason is that the rates will range from 12% to 25% or more. If one payment is missed or comes in late for that card, or any other card, the rate can rise to 35% or more. That will not be for just new charges, but even existing charges.
You’ll also notice that there will always be a clause that says something like:
These terms can be changed at any time at our discretion by sending notice to the card member within 15 (or 10 or 30) days of the change. If the card is used after that point the card member agrees with the terms.
That statement is basically saying that no matter what we’ve told you, we can change the terms at any time, charge you whatever we feel like charging you, and unless you have the cash ready to pay us off immediately you’ll need to abide by the new terms. Who would agree to something like that? A lot of people, apparently.
But what if you pay off the balance every month? I was doing that for about 15 years on a few credit cards I kept. One month, on a credit card from CHASE that I had held for about 5 years and paid in full each month, I had monthly charges for $1759 or something. In the number box I wrote $1795. On the payment line I mis-wrote “One-Thousand, Ninety five,” leaving out the “seven hundred.” Rather than calling me to say that I’d mis-written the check, CHASE cashed the check for $1095, said nothing about it until the next statement. They then charged me interest on the remaining balance and the balance for the next month. They agreed when they looked at the check that it was just a mistake in how I wrote the check, but they refused to refund the interest. I cut up the card and no longer use credit cards.
The lesson here is that even if you pay off the bill each month you’ll slip up somehow and they will get you when you do. They make the rules and are too good at what they do. It is better not to even play the game.
But what about the rewards points? Studies have shown that people spend more when using credit cards than when using cash. If you don’t believe this, take out cash each time you go to the grocery stores each month, without putting a limit on your spending, and compare how much is spent compared to a month when a credit card was used. Do the same thing when going out to dinner. The pain of spending money is not felt when a credit card is used. If you spend 10% more everywhere on stuff you don’t really need, is 1% cash back or in free airline miles you can never book really worth it?
So the answer is, no, there is no place in the wallet of a person who wishes to grow wealthy for a credit card.