The average American household receives a credit card offer every 10 days. (If you’re on Capital One’s mailing list, more like every 10 hours.) That average American household accepts a lot of those offers, and carries a balance of about $10,000 on an average of 12 cards, which is at least 10 too many. The average interest rate on credit cards is around 18%. Twenty percent of those cards are maxed out, and 35% of their holders pay a monthly late charge.
A helpful rule in your economic life is to think about every transaction from the other party’s perspective. In this case, look at the handsome annuity that your credit card balance becomes in the eyes of the card issuer. And if you can find an investment that pays a consistent 18%, let me know. Not only will I refund you the price of my book, I’ll retire from creating personal finance books and put all my money in that investment instead.
If you couldn’t pay your bills in 18th century England, you didn’t get to “call and work something out,” nor could you sue in civil court because your bank made its credit card application so pretty and the envelope so easy to open that you couldn’t say no. Instead, you went to debtor’s prison. Sometimes it seems as though the threat of incarceration might be the only way to get modern Americans to spend with discretion. You’re carrying more debt now than when you were 15 and working at Hot Dog On A Stick. Ever wonder why?
Money is a commodity, but it’s also a tool. A tool that can help you build a house, a career, a life. Lose control of your money, and it’s the credit card issuer that’ll determine how hard your nails will be hammered and how frequently. So when you get a mailer that reads:
“Instead of 18.9%, apply now and we’ll give you a fabulously low rate of 14.9%!”
understand that means
“We’d like an investment that pays 18.9%, but then we’d also like it to rain beer. An investment that pays 14.9% is still fantastic, though. Almost no investment in the world can guarantee that, besides the atrocious saving habits of the American public.”
Never carry a credit card balance. Sacrifice a month’s groceries and beg for orange peels if you have to. Regard paying your bill in full every month as an imperative no less important than locking your door every time you leave home. Depending on what neighborhood you live in, doing the former could save you more money than doing the latter.
If you carry no balance, it costs the issuer to keep you around. You’re a low-revenue customer. (Or better yet, a non-revenue customer.) Let the irresponsible borrowers with the $25,000 balances pay the salary of the MasterCard CEO and put the fuel in VISA’s corporate jets.
With a zero balance, you can look at the issuer/borrower relationship in a new light. You’ll notice that credit card companies plug their low interest rates and balance transfer rates like they’re being eleemosynary bighearts. “Act now, and pay just 9.9% on balance transfers!”
In other words, if you’re irresponsible enough to have rung up debt on a competitor’s card, come to us. You’ve proven yourself to be a juicy fish. You’re actually far better than that, because a 50-pound chinook salmon can only be eaten once. We can feed off your bloated carcass again and again. The issuer is saying, “Hooked on cocaine? That’s for losers. Instead, give our pure crystal meth a taste and you’ll never go back.”
If you pay in full, annual percentage rates and interest-free introductory periods become meaningless. The credit card company has to profit off someone. Let it be the ill-prepared next person, not you.
The longer your record of paying your balance in full, the bigger the limits your issuer should allow. Most introductory credit cards will only let you charge up to, say, $3,000. After you’ve paid in full for a few months, they’ll increase your limits. This isn’t to reward you for being a profitable customer, as you’re anything but. It’s in the hope you’ll slip up, charge more than you can afford, and that’s when they’ve got you. Another debtor on the hook.
This is not a condemnation of credit cards, says a man who would use his Hilton Honors AmEx at the neighbor girl’s lemonade stand if she’d only accept it (62,760 points and counting!) Credit cards are wonderful. They’re convenient, discreet, trackable, replaceable and inconspicuous in ways cash can never be. But if you use them without regard to their possible consequences, you’re the equivalent of a parent who thinks her baby’s nursery has just the right mix of temperature and humidity for storing loaded firearms.
Editor’s Note: Check out the True Cost of Credit Calculator to see just how much carrying a credit card balance will really cost you (and then check out the Cash Back Credit Card Calculator to see just how much money you can earn in cash back rewards with responsible credit card use!)
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