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Live and Learn

Personal finance topics with a real world touch... 
and puns, because they make everything more amusing.

Give me some credit, would ya?

Show of hands... #creditcards: are they helpful? hurtful? something in between? I like getting reward points and luckily credit card spending isn't where my impulse control suffers (homemade baked goods... that's where my weakness lies; well, there and chips & dip, and cheese and... ) so for me personally, they are sometimes helpful. But I also think they make spending too easy for me. I get it when people want to shy away from credit cards. They can be especially harmful when using them allows us to live outside our means. And at worst, we can saddle ourselves with debt that gets harder and harder to pay off. I'm going to walk us through some of the benefits and downsides of credit cards.

➕ Safety and Convenience— Carrying a credit card is more convenient than a wad of cash (even more so with the ability to pay via touchless phone technology— I love using my watch to pay and never even taking my wallet from my purse), and also safer because cash is an easy target. Stolen cash is usually a total loss, but if you notify the issuer immediately that your card was stolen, transactions made on the card are not your liability.

➕ Fraud— When a charge is fraudulent, the credit card company is liable for fixing the situation. Under the Fair Credit Billing Act, a credit card holder's maximum liability for fraudulent transactions is $50, although most credit cards have zero liability for all fraudulent transactions. In the case of a #debitcard, you may be without the money until the investigation is complete. That can be pretty serious if a large amount is in dispute. I try to avoid using my debit card for this reason.

Perks that vary by card— Almost all credit cards offer some kind of benefits, like cash back, purchase protection, roadside assistance, car rental and travel insurance, lost luggage coverage, and travel loyalty points. The higher the annual fee, usually the more valuable the benefits are.

➕ Improved Credit Rating— By using a credit card responsibly, you can also improve your credit rating. Remember, paying your card on time is one of the most important actions to take when you use a credit card.

High #interest payments— You can find yourself paying much, much more than an item is worth when you carry a credit card balance. Let's look at a $1000 purchase if you only pay the minimum (assuming $25) each month. It will take you over five (yes 5!) years and you'll pay $538 in interest. So that item that you though you got a deal on for $1000 actually cost you $1538. Not such a great deal anymore. (Please note that when your minimum payment is calculated by the credit card company, it often decreases as the amount owed decreases. That means you'll pay less and less each month, which significantly increases the amount of interest you pay and how long it'll take to pay off. In the example above, if you pay the interest + 1% of balance, you're looking at $923 in interest and almost nine and a half years!

Worsened Credit Rating— If you miss even one payment on a credit card, your credit score will take a hit. The effects are worse the higher your score is, so after working hard to get it up, don't let one (or more) missed payments screw you up. Credit cards are one of the few payments that I allow to automatically deduct from my bank account because I've experienced the panic when accidentally missing one.

Increased spending— Here's where credit cards start to lose some luster, even for those that don't carry a balance. On average, we spend about 15% more when we pay with credit card vs. cash. That's enough to make ya think twice about how worth it those reward points really are. If you are having trouble keeping your spending under control, the ease of credit cards might just be too much temptation.

➕/What about cash advances? With most cards, you can technically withdraw credit from a credit card for physical cash. Honestly, there are very few instances where a cash advance is a good idea. There is no grace period so interest accumulates immediately, they don't count towards rewards, and there is usually an additional fee. On top of that, the ATM you use will probably also charge a fee. You will be paying quite a bit extra for this cash, so pretty much unless it's an absolute emergency and you can't get out of it by paying on your credit card, avoid cash advances.

If you want to play around with a calculator to see the effects of different payment amounts, Bankrate has good resources. The site also has comparison tools if you're deciding which card to get. I don't have any affiliation with the site, it's just the one I personally use for these tools.

You may have noticed that it's not evident how I personally feel about credit cards. That's basically what I as a coach am here for: to leave my personal opinions at the door and help you evaluate what is right for you. If you aren't sure what you think, financial coaching may be right for you.  I can help you sort out your money and get you heading down a path towards joy.  What are you waiting for?  I'm here.

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