We often criticize (including myself) the credit card, but is he the villain? I recently read an excellent article by Adrianne Lazarro (‘In Defense of the Credit Card’), where he discusses how to make this financial tool blames the debt of much of the population.
The purpose of this article is to show that the credit card is not necessarily a villain, but the way many use it to be.
Why is the credit card not a villain?
If we think in a very practical way, although the interest rates of this tool are absurdly high, we only suffer from this interest if we do not pay the bill in full. Given this situation, it is not the card’s fault, but the person who misuses it, spending more than it receives and therefore running out of money to pay the full bill.
On the other hand, the lack of financial education of the population combined with the incentive of the media to make installment purchases also weighs on this equation. Still, in my opinion, this does not justify the indiscriminate way credit cards have been used by most of us.
The snowball begins to grow when people buy, conveniently forget that money is already committed to future payments and start making more purchases and accumulating more parcels.
When NOT to use credit card
Like most financial tools, credit card has its advantages and disadvantages. For this reason, there are situations where card use – financially speaking – is the best choice and others not the smartest.
Let’s take a look at some cases where credit card use is not recommended:
1) When there is a discount for cash payment
This point is self explanatory. If there is a possibility of paying a smaller amount in cash, it makes no sense to split the purchase on the card, since interest is embedded in the price.
2) When we have no control over the invoice
If you don’t have the discipline to know when to stop using the card, don’t even start using it.
Even if the forward purchase is the same as the cash payment, if you have no discipline, you certainly will not know how to take advantage of this small financial advantage.
3) When we buy on impulse only to earn points on loyalty programs
Many regularly use their credit cards with the “excuse” that they are earning points or miles in loyalty programs.
No doubt there are some advantageous programs, but thinking about just accumulating points can lead to buying unnecessarily on impulse.
When to use credit card
Just as there are situations where using the card is not recommended, there are also cases where using it is a good choice (again, financially speaking).
However, there are two premises for this:
- There is no discount on cash payment;
- Be disciplined.
Sometimes there really is no flexibility to negotiate a cash discount. Given this, the payment with the card is more financially advantageous. I explained this in detail in the article When buying cash is not the best option.
Considering the situations in which the term value is not increased and the consumer is disciplined, it is advantageous to use the credit card:
- To earn points in loyalty programs;
- For convenience and safety, avoiding walking with large amounts of cash;
- To record all expenditures and identify leaks in the budget, contributing to financial control.
How I do?
Despite these advantages, I do not usually use the credit card. Even though I am quite disciplined, I loathe the feeling of being in debt or paying benefits for consumer items. In my case, the decision is not financial, but psychological. I know a person who bought a phone 10 times but was robbed in the first month. She commented that one of the worst feelings is to continue paying for a good one that no longer belongs to her.
I often recommend, as a general rule, that credit cards should be avoided. I say this because the vast majority of people are not disciplined. But, like every rule, there are exceptions. And I believe they were explored in this text.