Swipe left, swipe right, swipe up. We swipe all day long, and by the end of this article, the word “swipe” is going to sound very odd in your head. What about your credit cards? We swipe those all too frequently. In fact, the United States has swiped away over $1 trillion in credit card debt, according to an analysis by Experian in February of 2019.
This is a ghastly number. About 41% of American households averages $5,700 in credit card debt. Keep in mind, this isn’t even taking into consideration other debts including auto, home, or student loans, which only worsen that statistic.
Credit cards are an interesting anomaly. With hardly any effort, you can purchase just about anything you want instantly. They provide the same instant gratification many of us get from social media, and regrettably, similar detriment.
How Does it All Work?
Credit card companies have the money you need to purchase anything you want. By purchasing an item on credit, the credit card company pays for the item, and you promise to pay them back at the end of the month. If you don’t, you owe more money back in the form of interest. This is a basic financial principle most people understand. It sounds reasonable and fair, but to defining it so casually can be dangerous. Instead, let’s define it more vividly.
I know you’ve seen movies with the classic loan shark personas. Usually some guy is in a pinch and needs money fast. Let’s say he needs $50,000 dollars. He doesn’t have 50k of his own, and the bank won’t lend him nearly that much. Being resourceful, he goes to a loan shark (who is almost always Italian for some reason) to lend him the 50k he needs. He receives the money from the loan shark, and the loan shark always says “pay me my money back in two weeks, with interest.”
Of course, the guy does something stupid with the 50k and has no money left after two weeks is up. Not to mention, he actually owes the loan shark more than 50k, because the shark wanted interest for the loan. To wrap up a great story and movie, the loan shark shows up to the man’s house with his posse, and then brutally murders the man who could not pay back the 50 grand.
This is the (nearly) exact business model that credit card companies operate on. You need the money now, they give it to you, and then expect you to pay it back. If you don’t, it’s your life! (Not really). But the concept is the same. Would you risk your life for a short term loan? Would you risk your life for an impulse purchase at Nordstrom?
Most people would say. “No, my life is worth more than a new TV or purse.” Granted, death is not the crime for not paying back your credit card loan. However, it is a hole that, once dug, gets deeper and wider exponentially.
What does this even mean? Well, when you get a new credit card, the credit card company issues you a card with a certain monthly debt limit to prevent you from spending too much. They determine this number based on some generic information about you – your income, age, number of dependents, previous credit history, etc. Every time you swipe your card, you add on debt to your life. You are responsible for paying that debt back. Your credit score is a number reflective of how much of your debt limit you utilize, and how well you pay that debt back.
This credit score is actually shared information, however, not public information. This number is shared between credit card providers, banks, loan institutions, and almost any other financial institution you belong to. The reasoning behind this is to prevent anyone from applying for a bunch of different credit cards/auto/home/student loans all at once.
This number also affects you. Your credit score determines your ability to apply for other loans. If you want to purchase a house one day, you better have a good credit score! Banks won’t give a six-figure mortgage loan to someone with a poor credit score.
The Good and The Bad
Credit cards a great for a number of reasons. They eliminate the need to carry cash. They’re small and convenient. They have the ability to mark your spending habits favorably in the eyes of financial institutions. Your credit score serves as an incentive to make smarter spending choices.
They are also bad for the same reasons. They eliminate the need to carry cash. The lack of physical money in a transaction followed by instant gratification is addicting and dangerous. They have the ability to mark your spending habits unfavorably in the eyes of financial institutions. Your poor credit score reflects a lack of discipline and control over your own money.
The Good and The Bad (Part 2)
What determines good and bad credit scores? Very simply, the credit score scale runs from 300 to 850. A score of 300 is the worst, and 850 is exceptional. Whoever made that scale was probably collaborating with the famous physicist Daniel Fahrenheit, who determined that water freezes at 32 degrees and boils at 212. In other words, it doesn’t make sense, but it is what it is. Most people fall within the 500-700 range, otherwise known as the Fair, Good, and Very Good categories.
Credit Cards Brutally Reveal Your Honesty to Yourself.
Do you receive your bills at the end of each month and think to yourself, “I hate paying my bills!” Or maybe “Wow, I did a little more damage than I thought…” And the classic “How did I even spend this much money?”
Admittedly, it happens to most of us. We fall victim to the plastic convenience and instant gratification of our credit cards from time to time. Some times hurt more than others, but at the end of the day, those debts still need to be repaid.
The next time you have any of those thoughts, think about how much control of the situation you have. Think and reflect how the credit card bills made you feel when you got them. It’s not a great feeling, and the lack of financial control is brutally eye-opening. It’s hard to point fingers for your lack of financial restraint when the receipt of your spending habits is staring at you right in the face.
It’s hard to point fingers for your lack of financial restraint when the receipt of your spending habits is staring at you right in the face.
Develop Your Money Mindset
Try to think of your credit score differently. Think of it as an insight into how good or poor your relationship with money is. Is it good, or bad? Take time to reflect – what can you change to improve your habits? Determine what steps you will take to get there. It is a wonderful feeling creating disciplines to improve your relationship and control over your money.
Those who understand the value of credit cards, and are aware of their dangers, are happy to pay their bills at the end of the month! They say to themselves, “Pay my bills, decrease my debts, increase my assets? Absolutely!” It is a vastly different and much more fulfilling emotion. It is one of many steps that develops your money mindset, and paves the path towards a better financial future.