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Why Credit Card Interest Is So Bad for You
We've said before that carrying a credit card balance is the financial equivalent of smoking. It's not because debt is bad. A mortgage is debt and we recommend most people get one of those. It's the type of debt that makes credit card debt so unhealthy.
First, why credit cards are good
Credit cards are a tremendous convenience in making purchases. You can make big purchases without having to carry cash. You can buy things online and over the phone. And sometimes you can earn awards for simply using your credit card instead of cash. But the important thing to keep in mind is that credit cards are a transaction tool, not a means of financing.
Why they are dangerous
As we said above, it's the type of debt. Having $15,000 in debt isn't so bad if it's for a car that you need or for education which will improve your earning power. But, there's no reason that debt shouldn't be at a reasonable interest rate and come with a payment plan that has you out of debt in a few years. Credit cards often carry interest rates that are so expensive you can barely pay off the interest each month. Also, they come with no plan to get rid of the debt. In fact, you're encouraged to spend more and to only pay off a ridiculously small balance.
Why do we do it
What's interesting about credit card debt is how we just slip into it. Very few people sign on the dotted line and say to themselves, "Okay, I am going to borrow $15,000 at 15% interest." That is how financing is traditionally done. You go get a loan. But with credit cards, we just slip into it almost unconsciously buying clothes and dinging in $50 increments. For many people, credit cards just add elasticity to their spending power. And once they get used to the elasticity, it takes a tremendous amount of discipline to unlearn this seemingly new found flexibility.
Why, why, why?
Some people get it when they get their first credit card statement showing the $20, $30 or $40 they spent in interest. Other people learn the hard way, spending themselves to financial oblivion. But the cold hard fact is that as long as you carry a credit card balance, with few exceptions, you'll never be wealthy. One way to grasp this concept is to consider the other places that money spent on interest could go. If a 25-year-old took $134 that they were spending on credit card interest and saved it, earning a modest 6% each year, that money would grow to be $250,000 by the time he or she is 65. That's the bottom line. How many of us have $250,000 to waste?
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