Recently updated on: December 14, 2023
TL;DR - When using a credit card, you need to know your limitations and how to use it properly. It is not free money, so you need to pay your bills in full and on time.
One of my favorite authors regarding personal finance is Dave Ramsey, and one of his usual pieces of advice is to avoid using credit cards at all costs.
I guess his advice stems from the culture of industrialized countries regarding credit cards, like the United States, where using these plastic cards and getting into debt is the norm.
He also often repeats this beautifully summarized quote to the culture of consumerism. "We buy things we don't need, with the money we don't have, to impress the people we don't even like."
In his radio show, he often shares stories of people who got deep into consumer debt, which caused serious problems in their personal lives, work, and relationships.
So, it is critical to understand that owning a credit card is not just a privilege but, more importantly, a responsibility.
Debit Card vs. Credit Card
Now, depending on how we use them, it can be a convenient tool to purchase stuff or a shovel that will dig us deep into the debt hole.
While some may argue, including Dave Ramsey, that it is better to use debit cards instead of credit since you'll only use the money you already have, I'd like to point out one crucial point when contemplating getting a credit card over a debit card - security.
While both credit and debit cards are usual targets of fraud, it is easier to dispute credit card transactions than debit cards.
So, getting a credit card should not be as black-and-white as you think. You can still have a credit card and responsibly use it, especially in the age of online purchases.
Table of Contents
The Problems With People Who Get into Credit Card Debts
1. They think that credit cards are free money.
This may sound funny, but some people keep swiping their cards without thinking they will pay for it.
They just stop when they reach their card limit or once they have buyer's remorse a few days later.
Repeating that cycle of senseless spending for several years will bury anyone in debt.
2. They accept the offer to increase their credit limit.
Some consumers think banks offering to increase their card limit signifies privilege and success.
However, this "privilege" becomes a curse to people who don't have the financial discipline to handle such responsibility.
3. They own multiple credit cards.
Some people treat these plastic cards as a collection. Some even have more than five cards in their wallets. They just juggle each card to use the one still not "maxed out."
4. They only pay the minimum amount.
This is one of the biggest mistakes of all. Card users often don't know how compounding interest works, which digs them deeper into the debt trap.
So, when I applied for a credit card three years ago, I made sure to place some rules on using it properly.
My Personal Credit Card Usage Rules:
1. It is not an emergency fund.
Just like what I wrote about emergency funds, you should never use your credit card to cover emergency expenses.
I once overheard a pregnant woman calling about how she was "reserving" her credit card limit for her delivery. I think it was unfortunate since they had nine months to prepare for her delivery.
2. Do not increase the card limit.
My card limit is only P30,000. Though there were many times when my bank called to increase my card limit, I always respectfully declined their offer. Doing this keeps me in check.
However, depending on your needs, you may also consider increasing your credit limit to a conservative amount not too far from your salary.
3. Use your card for installment purchases only if it has zero interest.
When I use my credit card to pay for items in installments, I always check if it is zero interest.
Paying in zero-interest installments gives some of the money I would normally pay in cash the opportunity to earn through my other investment vehicles.
4. Always apply to waive your annual membership fee.
When I applied for a credit card, it was through my previous companies' perks. For two years, my annual membership fee was automatically waived.
However, the fee was included in the billing after two years, so I needed to call customer service to request that the fee be waived.
If you have a good credit standing, they will most likely approve it.
5. Don't use your card if you can pay in cash.
Credit cards are not a replacement for cash. They are just tools I utilize to pay for subscriptions and services requiring digital payment methods.
For larger purchases like electronics and appliances, some businesses offer a discount when paid in cash.
6. When using credit cards, ensure you already have the money to pay for your "credit."
When I use my credit cards, I make sure I have enough cash to pay for it even if I don't get my salary on time.
Also, the purchase should be in my monthly budget to predict my incoming expenses easily.
7. Always pay in full.
One of the most common mistakes of people who fall into credit card debt is not paying in full, which results in compounding interest on their debt.
By paying in full, my account will have no added interest on the next payment cycle.
8. Never accept credit-to-cash promos.
Though many credit-to-cash promoters call from time to time, I make it a rule to decline their offer every time.
The "low" interest rate may initially sound enticing, but when I consider it, do I really need that money right now? And always, my answer is no.
Secured Credit Cards vs. Traditional Credit Cards
One of my friends uses a secured credit card, and its idea is pretty good.
According to Investopedia, a secured credit card is a type of credit card that uses the depositor's cash balance as collateral. Some secured credit cards allow a card limit of 80 to 90%, depending on which bank you opened an account with.
For example, your deposit is P100,000. If your allowed limit is 90%, then your card limit is P90,000.
This way, you will never be in trouble for not having enough money to pay your credit card bills.
Final Thought:
Owning a credit card requires financial discipline. So, if you are prone to getting into debt, I advise that you don't touch one, but if you already have, I suggest closing it immediately.
Don't think having a credit card is an "adulting" requirement or a riteof passage to adulthood just because almost everyone has one.
Like almost everything, there are pros and cons. So, if you plan to get a credit card, make sure that the pros dramatically overwhelm the cons.
Credit cards, just like money, are not inherently evil. It is how we use them that matters.
At the end of the day, credit card problems are not merely money problems; they are more behavioral problems.