One day in the mail you get a fancy envelope. “You’re approved for up to $10,000!”
“Awesome! I can finally buy that fancy laptop I wanted!”
Sure. Go for it. You’ll be paying the price later. Literally.
The perceived utopia of credit is waved in the faces of vulnerable people. Don’t have money? No problem! You can buy what you want right now! Go buy that expensive laptop. Take a cruise. Add on to the house. Sail the ocean blue! Wait. That was Columbus. Whatever.
You start imagining all the things you can do, all the stuff you can buy. But there’s a problem. You don’t actually have that money.
When I was in my early 20s, I got stupid with credit cards. I dug myself deep into debt. I was young and stupid. Here’s what I wish I would have known at the time.
Credit cards are not free money
When you’re approved for a $2,000, $5,000, $10,000 credit card, it is not as though you have instantly earned $2,000, $5,000, or $10,000. Many people treat credit as though it’s cash in the bank.
In reality, credit is an offer from a lender (often a bank) to you. The bank says “You may borrow money up to this amount with the understanding that you will pay it back. If you don’t pay it back fast enough, we will charge you interest.”
Credit cards are not free money any more than a loan is free money.
Credit cards are expensive
Interest. Banks are very… interested in this. (Sorry that was a terrible pun.) Interest is the price you pay for credit. Depending on your credit score and how much you borrow, your interest rate will vary. It will also vary from lender to lender.
Let’s say you spend (read borrow) $1,000 with a credit card.
As time goes on, the lender will start charging interest on what you owe. So if you spent $1,000, you don’t owe just $1,000 any more. Unless you’ve paid off that balance before the end of your billing period, you now owe that $1,000 plus interest.
If you’re slow paying off your debt, you could wind up paying far more than $1,000 for the convenience of borrowing that money. It would have been cheaper to save up for that big purchase and use cash or debit.
Credit cards are money-makers for lenders
When lenders lend you money, they do so knowing they’ll be making bank on interest. When you borrow $1,000, they don’t expect you to be able to pay it off before your billing period ends. They anticipate charging you interest.
They know they’ll get their $1,000 back plus what they charge you in interest.
Interesting, eh? No. Painful.
Creditors don’t lend you money out of the kindness of their hearts. They’re expecting to make a profit off of you. They don’t care if you’re strained financially. If you can’t pay on time, expect to be hit with late fees and penalties.
Credit cards are not easy to pay off
It’s for that reason that credit cards can be very difficult to pay off. Imagine you’ve spent that $1,000 with your credit card.
You didn’t have that money when you used your credit card. Now you’ll have to get that money somehow plus interest. And every month you don’t completely pay off what you owe, more interest is charged.
It’s like running a race, but the finish line keeps moving. If you want to have a chance to finish, you have to move faster than the finish line. If you want to pay off your debt, you have to pay it faster than your interest accumulates. Especially with a high balance, that can be very difficult.
Credit cards should not be used to fund business
Do you have a great business idea and need money to get going? You’re confident your business will pay off your credit debt. It’s a sure thing, right? No. Stop.
This is a mistake I made. It is so easy to dig yourself deeper into debt by spending money to pay off your debt. When building my internet marketing business, I spent thousands of dollars and made the problem even worse.
Not smart. At all.
If you’re trying to build a business, please please please don’t use credit. You’ll thank me later.
So, don’t use credit ever?
No. I’m not saying you should never use credit for anything ever. There is a time and a place. However, it should not be used recreationally. America has an addiction to credit. We want things we can’t afford, so we spend money we don’t have. Don’t fall into that trap.
There are legitimate uses for credit. But credit cards should never be used to buy something when you have the ability to save up for it.
The moral of the story
Credit can be a great tool. But, like any other tool, it must be wielded with wisdom and caution. Available credit is not money in the bank. Credit debt is expensive. You will wind up paying both what you spent and the interest that accrues. Credit cards aren’t as easy to pay off as you think they are when you’re using them. You have to race to beat your interest rate.
Be smart. Don’t buy what you can’t afford. You literally can’t afford to buy what you can’t afford. Let that sink in for a moment.
Note: I’m not a financial adviser, and this is not intended to be legal financial advice. If you have questions about your finances or how to use credit responsibly, please talk to a financial adviser.