We have all at one time been warned about the pitfalls and dangers of playing with plastic. Our parents would scold us profusely if they saw us doing what we considered were amusing acts such as making masks out of plastic bags. I can still recall my mother’s stern warning—“Don’t play with plastic! Plastic can smother you!” It’s hard to envision something so seemingly innocent as plastic that is primarily used to protect and to preserve food, necessities and other valuables can literally take your life away.
We often refer to credit cards as plastic. Like its namesake, if used other than its intended purpose—figuratively speaking, plastic can smother you! What is the purpose of credit? There are some advantages to using credit cards when used correctly. Credit cards should be used to protect and preserve your income. Its wide acceptance by merchants in the United States and abroad can alleviate the risk of carrying large sums of cash. Carrying large sums of cash can subject you to theft and/or lost. If you misplaced, lost or had a wallet full of cash stolen from you, your chances of recovering your money are slim. However, if you misplaced, lost, or had a wallet full of credit cards stolen, you can report the lost cards to your credit card issuer. As long as you follow the correct reporting procedures, you would be liable for a maximum of $50. In addition credit cards can allow you to take advantage of bulk discounts and various sales stores offer which oftentimes take place on days when you are short on cash. In the event of purchasing defective merchandise, as long as you properly follow the correct reporting procedure, you can withhold payment for the defective merchandise until an agreement has been worked out. If you purchase defective merchandise with cash or check, it can take months before being reimbursed. Lastly renting a car, booking a flight and/or reserving a hotel room is almost impossible without a credit card. If used wisely credit cards can serve as a convenient tool you can use to save and make money. Bear in mind that the debit cards, which works like a credit card can be utilized for all the above advantages of a credit card while at the same time avoiding debt.
When a credit card is used other than its intended purpose such as shopping sprees, unplanned purchases, emergencies and as a supplement to your income, credit cards can wreak havoc on your finances, literally smothering you in a pile of escalating bills. This often leads to health and marital problems that can accentuate the smothering hold the misuse of plastic inflicts on its user. Credit card companies have been very effective in persuading the general public that by owning credit cards you are a part of a privileged group. People boast and brag about having premium, platinum and gold cards. It’s viewed by many as a status symbol. In truth it suggest nothing but the mere fact that one person may have the ability to get into deeper debt than another person can.
Because of effective marketing and consumer ignorance—instead of using credit cards to protect and preserve income, millions of people are getting caught up in the glitz and glamour of purchasing items they would not think to purchase if they were using cash. This has resulted in Americans owing more than $400 billion on credit cards with the average household having up to eight credit cards with an average balance of $2,000 on each credit card accruing at an average annual percentage rate of 18 percent. Given the fact the average consumer has the tendency to make the minimum payment on their credit card while at the same time continuing to make new purchases, it can take up to 40+ years before the credit cards are paid off.
While the general public is running up credit card balances, purchasing non-essential items, non-income-producing items and/or items that depreciate—card issuers and merchants are reaping huge profits. Merchants know from statistical data that people will generally spend 30 percent more when using a credit card vs. paying cash. Because of this fact merchants are willing to pay card issuers between 1-6 percent known as merchant discount fees on every transaction a credit card is used. This charge to the merchant is generally passed off to the consumer by way of higher prices. Credit cards issuers generate revenue three different ways with credit cards—merchant discounts fees, interest paid on the balance and various fees such as member fees, late penalty fees, cash advance fees, and over the limit fees.
Be mindful in how you use your credit cards for purchases you make with plastic that are seemingly innocent that can literally take your financial life away. Don’t play with plastic! Plastic can smother you!
(Mortgage and Money Coach Damon Carr is owner of ACE Financial. Damon can be reached at 412-856-1183.)