Credit Cards: Friend or Foe?

In our day, credit cards are everywhere. Almost everyone has one and almost every major store and retailer now offers their own type of credit card. Note that this is different from a debit card, which takes money from your actual checking account. However, the question can be asked, are credit cards a good thing? To answer this, let us first consider what a credit card is. A credit card is a card that allows you to borrow money up to a certain amount; then, you pay it back at a set amount monthly at a certain interest rate. Therefore, this card allows you to spend money that you do not have. For example, say you want to buy a new $1,000 tv today, but do not have the money for it, all you do is use your credit card and you have your tv, right?

No, you now have a debt balance on your credit card that you have to pay at an interest rate and you end up paying even more than you borrowed. Using the $1,000 tv as an example, if you borrow $1,000 from your credit card at the average interest rate of 20% and a monthly payment of $100 you will end up paying a total of $1,103.02 (assuming you do not spend anything else on that credit card). That means that you paid $103.02 just to have the tv right now! Imagine walking into a store with $1,000 cash and you go to buy the tv and the person selling it says that you have to pay a $103.02 fee to take it today. Would you do that? Probably not, because it would be ridiculous for a store to charge such a fee. Yet, everyday, people are making the decision to pay that extra fee that they could avoid with a little patience and budgeting.

In addition, when borrowing you become a servant to that debt. Proverbs 22:7 says: "The rich rules over the poor, And the borrower is servant to the lender" (NKJV). When in debt you are not free to spend as you wish, instead you are being forced to make a certain payment to that debt every month at an ever growing interest amount and if you do not there are legal consequences. There is no cancelling the service (like with utilities and subscriptions), no choosing to go with a lower plan (like with a phone bill), no downgrading on a house (like with a rental or mortgage), and really no benefit other than satisfying your desire to have something now. Therefore, by using a credit card you are really deciding to pay more for a product and tie yourself to a monthly debt that takes precedence over everything else, including fun things. Does this sound worth it?

Now, one may object saying that it builds credit or that it is good for an emergency. First, it is not a good way to build credit. Paying a mortgage or rental, paying utilities bills, and even getting a car loan are all much better ways to build credit. I know one person who built a 770 credit score from having no credit history all just by a car loan and a phone payment. Building credit is all about making payments on time and having a long history of on time payments. In addition, a credit score is not all that matters when trying to get things such as loans. Debt to income ratio is also very important and credit cards just make that ratio worse, which will likely give you a higher rate on your loan. Second, credit cards are not good for an emergency, because they set you up for a possible financial emergency later. Instead, it is a much better idea to have an emergency fund planned out in your budget and saved in a savings account. Yes, that takes time to build, but that is why you start building it now.