Lesson Twenty-Nine — The Curse of the Credit Card
There is no faster way to crash your rocket than to dig yourself a financial hole through credit cards.Not only will you never get off the launch pad, you will be buried up to your eyeballs in debt. Credit cards in the hands of the inexperienced or undisciplined are bad news!
Let me tell you how the credit card companies make money. You buy something for $500 on your credit card because you don’t have $500 in your pocket. When you get your monthly statement, they only ask for a minimum payment of twelve dollars. Sounds like a pretty good deal. Trouble is, they don’t tell you that the interest for the month is ten dollars. Next month, and the month after, you keep making those twelve-dollar payments. After a year of making minimum payments, you have paid $644 for a $500 item, and you still owe $460.In two years, if you continue to make the minimum payments, you’ll have paid $788 for that $500 item, but you still owe $397.In three years, it’s $932 with $300 still owed. Now, you are up to $1,232.That is the magic of compound interest. Trouble is the credit card companies are on the receiving end of that magic, while you are on the paying end.
If you couldn’t afford the $500 when you bought it in the first place, how can you now afford to pay $1,232 for it three years later? You can’t! What’s worse, the thing you bought is probably used up, broken, lost, or out of date, and you still owe money on it.
It is easy to see how people get in trouble, especially with the credit car companies encouraging you to use the cards for everything. The way to beat this game is not to use the credit cards to finance your purchases. Only use them if you have the money in the bank to pay the bill in full as soon as it arrives. This avoids the outrageous interest charges.
When you have savings, you have freedom. When you are in debt, you are a slave to that debt. When you are burdened with debt, you are under constant pressure that affects almost every other aspect of your life. Instead of enjoying the money you earn, you hand it over to the credit card companies. Because you are giving all of your money to the credit card companies, when you want or need something, you have to use the credit card again and things continue to spiral downward. Instead of working because you want to, you work because you have to in order just to break even.
For almost all of us, money is the primary reward for our work. In other words, we work for the money. We like money. We like the things we can buy with the money. It is the money that makes the work tolerable.[Note: This is not the ideal situation, but it seems to be the norm.]When you are up to your eyeballs in debt, you end up working just to pay the bills. You no longer get to enjoy the money. Work no longer has the same
reward as before. You aren’t happy at work. You don’t get raises or promotions. You may even get fired.
Saving money, on the other hand, is great. As I said earlier, when you have savings, you have freedom. If you have money in the bank, you feel strong and confident. Your outlook on work improves. You aren’t working because you have to. You have savings. You could stop working for a month if you felt like it. You don’t have to put up with that boss, you can quit right there on the spot and look for another job. Why? Because you have money saved up. But, chances are you won’t get fed up with your boss because your boss won’t give you a hard time. Why? Because you have savings. You don’t need to work, you want to work. Therefore, you are happier about it, more pleasant to work with, more productive, and probably get a raise. Unlike your buddy who is deep in debt and is very unhappy about everything, especially work.
When you have savings, you also are less likely to spend you hard earned money on frivolous things. Unlike when you use credit cards, you say, “Man, that’s going to cost me half my savings. Is it really worth it?” You spend less and save more.
As great as saving money is, that is how bad credit cards are. Credit cards are the complete opposite of saving. When you save money, you are building a fortress, brick by brick to help protect you from unforeseen events in the future and provide you with the resources to take advantage of unknown opportunities that may crop up down the road. When you use credit cards and do not pay them off in full each and every month, you are digging a hole that just gets deeper and deeper. Before you can build your fortress, you have to completely fill in the hole you have dug. Unfortunately, this never seems to happen because credit cards are habit forming.
If you don’t have the money, don’t buy it. If you don’t have the money but need it, earn the money, and then buy it. Mow some lawns. Wash some cars. Flip some burgers. Stuff some envelopes. Sure, credit cards are easier, but you have to pay for the item and the credit card company. What makes it worse, is that they get exorbitant rates of interest on the money you owe them. That’s why they have their offices in those big, tall, skyscrapers. You may not like the idea of flipping burgers to buy what you want, but you could never flip burgers fast enough to keep up with their interest rates.
