Hello best life seekers!
Credit card companies rake in billions of dollars on interest charges every year. You therefore ought to be dubious about where the claim comes from that we should apply for a credit card in college in order to build up our credit. After all, most of us create a credit history in our college years simply by carrying student loans or car loans. Paying or not paying on these will build our credit history. Given the prevelance of debit cards, credit cards are simply a convenience and should be used as such. People forget this.
Mostly I think the financial services industry promotes the “open a credit card to build credit history” schtick for financial gain. Why? Because only 35% of card owners actually pay off their balances month to month. The rest, 65% of card holders, do not. Since the average credit card’s interest rate is 15%, card companies are disingenuous for promoting “build your credit history” when they have a 65% chance of every newly opened account being a revolving one. And currently, they already have over 364 million accounts, 65% of which are accruing interest every month.
So basically the financial services industry is only out to sell you something, not help you build credit or save money. That’s how they stay in business and you lose money. Be a savvy consumer and understand how to use credit responsibly like the 35% that pay off their balances every month. If you can’t do that, close your cards and use your debit card to stop digging yourself deeper into debt.
Here’s what carrying or not carrying a balance says about you. It can be a deep dive into your psyche so buckle up.
#1 – Responsibility
If you pay off your credit card month to month without effort and use your card for convenience to generate bonus points and rewards rather than out of a need to borrow, then you’re probably a pretty responsible adult that’s low risk for defaulting on financial commitments – from mortgages to child support. In your personal life, maybe you’re pretty together too. If nothing else, you have stable income and appear to live within your means. Congrats. You are in the 35% Club!
The average American adult, however, has over $4700 in credit card debt and the majority of card holders seem to view revolving credit as extra money rather than the debt it is and fail to comprehend the costs to their financial stability. Maxing out card after card or even carrying a balance more often than not is a sign of irresponsible behavior – financially and personally. Being unable to wisely manage your money puts your finances at risk, increases your anxiety and stress, and can threaten your family’s security. Ignoring that is perilous and is akin to putting your head in the sand or singing “la la la” while plugging your ears with your fingers. This is childish behavior, not the hallmark of responsible adulthood.
When I meet a young adult with money problems, I remember my own at that age but when I meet a fellow adult in their middle years who spends like there is no tomorrow and shuttles debt from card to card, I know they don’t have their sh*t together.
#2 – Financial Literacy
The number one adult skill we need but few of us learn is financial literacy. Most people hate math. Even the simple subtraction and addition necessary for monthly budgeting seems impossible to them, even though that’s 3rd grade math. Throw in some multiplication and division and you’re only up to 4th grade level. Even investing basics that can make you a millionaire by retirement (read David Bach’s The Automatic Millionaire) only require junior high math. Aren’t your smarter than a 15 year old?
Carrying or not carrying a balance shows your financial literacy. If the average card’s interest is 15%, the literate person knows it’s senseless to carry a balance. You want to earn 15% on your money a year, not see it vanish from your bank account because you charge your daily Starbucks addiction and only pay the minimum month to month. That’s crazy! But most people do it. They’re living wealthy today and ignoring the poorhouse of the future. At the very least, they’re wasting money that could build their wealth and financial independence.
To be fair, when we open our first cards as young adults, we probably don’t know a lot about personal finance but a year of using cards or dealing with any other debt should teach us something about financial math and instill in us the necessity of financial learning in order to use money and credit wisely to get our financial house together. After all, in your golden years you want to be walking beaches, not eating cat food for your meals.
#3 – Dependability
If you pay off your balances regularly, you show lenders and others that you are a dependable person. You take your obligations seriously and are reliable enough to stick with them. Missed payments and defaults show the opposite: an inability to plan, anticipate problems, organize and execute.
People who chronically miss payments have poor money management skills. Late payments indicate an inability to organize. Lenders will see this as evidence that the person will shrug off responsibilities when inconvenient or rationalize their defaults as “serves the other person right” or “it’s not my fault” or “it’s no big deal”. They won’t take the sometimes hard steps needed to right their sinking financial ship.
While we often care little for the trials and tribulations of fat cat financial institutions when card holders default, the defaults themselves are signs of bad behavior, especially once you’re past 30. At that age, you should have learned money basics and enforced some financial controls over your spending. Of course extenuating circumstances do occur. Life isn’t all roses but past 30, we should at least be stemming our losses, not racking up more needless debt.
On a more sobering note, if you’re dating someone who chronically misses payments or defaults on their debts and they aren’t making serious efforts to change their money behaviors, expect them to also miss or default on the mortgage or child support down the road. Or at least don’t be shocked when they do.
In order to live the good life, we need to understand money and its use. The fact that 65% of card holders carry a balance should alarm you, particularly if you’re one of the 65%. Of course sometimes things happen but chronic behaviors should cause self-reflection and remediation like it did me when I racked up over $8000 in credit card debt in my mid-20s. Back then I freaked out and learned how to turn things around. Believe that you can too.
Your credit card habits are a reflection of your ability to organize, anticipate problems and budget. Those habits are also windows to the soul, showing the strength of your personal traits when it comes to responsibility, problem-solving and dependibility. When you boil it down, financial literacy is really about taking responsibility for your life and undertaking the actions that serve your long-term strengths and well-being. Responsibly using credit cards is part of that picture.
Looking to right your financial ship or tackle your debt? Read my articles on the Secret Money Formula that took me from way in debt to financially free in 10 years. I also made this list of the best books that helped me in my financial journey. The path to financial freedom exists. Don’t ever think it doesn’t.
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