Last weekend my daughter and I had a talk about credit cards after she saw me use my debit card at the store. Here’s a sample of our exchange:
Her: “Dad, I thought you weren’t supposed to buy stuff with credit cards.”
Me: “That’s true, but that was a debit card I swiped in the store. Debit cards take money right out of my checking account instead of borrowing money from the bank.”
Her: “Borrowing money? You mean credit cards are like a loan?”
Me: “Well, yes. They are a loan – one that you have to pay back in a short time or you get charged interest.”
You can see what she was thinking. Most people think of loans as something you apply for inside the bank, across the table from a neatly dressed banker. You fill out mountains of paperwork and sign your name a dozen places and then you shake hands with the banker across the desk.
Borrowing money on a credit card is much easier, and therein lies the danger. Once approved, you are free to spend right up to your credit limit (and often times beyond) without any additional scrutiny. No one asks if you can afford that item, or asks how you plan to repay the item. No one asks for collateral in case that item cannot be paid for long term. No, we simply swipe the card and go.
Maybe I could have avoided going into debt in the first place if I thought more like my daughter. She’s right – credit cards are a loan. And in most cases, they would represent loans on very bad terms. Imagine sitting down at a bank to finance new bedroom furniture and agree to paying 24.99% interest!
So to those struggling with credit cards I offer up this bit of advice. Shift your thinking about credit cards. Imagine every single time you use the card and sign the receipt it is the equivalent of signing a note for that amount. But banks don’t want you to see credit cards this way, which is why they go out of their way to improve the design and “convenience” of credit cards. You didn’t honestly think they let you pick your own card design, or have it available in key-chain sizes to help you?
Banks recognize that the less their credit products look like a loan the better. So they wrap them in plastic, and cut them down to fit in your wallet (or on a keychain, see picture above), and maybe even pay the NFL to let them put the logo of your favorite team on the background. Pretty snazzy, huh? Well don’t be fooled. Those things are miniature loans riding along in your back pocket, and they have the potential to wreak havoc on your financial life if not used properly.