Why Your Card Deserves Some Credit
A friend offers you an investment that guarantees a 16.79% return. (I know there are no guarantees. Pretend the friend is Abe Lincoln.) This isn't a one-year thing, either; the friend promises the investment will last at least your lifetime, and possibly your kids'. You can buy in for $8000. Do you?
Of course. A perpetually guaranteed 16.79% is the Ultima Thule of investments.
This investment is already in the portfolio of the average American household — but doing its job for someone else. The investment is credit card debt, and it's the reason MasterCard CEO Ajay Banga lives in a fancier house than you do. That's neither wrong nor immoral. It's a consequence of you signing an agreement with a card issuer, and the card issuer following it to the letter.
We're so used to it that it's easy to forget what a boon credit cards are, freeing us from always carrying cash and giving us 30 days (and up to 60) to pay for something without penalty. Disputing charges from crooked merchants is a lot easier with plastic, too. Naturally, the issuers deserve something in exchange for this. Remember that their business model is fully contingent on one thing: people's refusal to look at price tags.
Welcome to a fundamental shift in thinking, one that pays enormous dividends: look at every transaction from the other party's perspective. The woman selling patio furniture on Craigslist isn't appealing to your sense of profligacy. She's just trying to clean up her garage without having to do any work, and maybe getting a little money in the process.
From the viewpoint of a credit card company, the average cardholder's balance is an annuity that never stops giving. If you're not going to do the one thing in your power to end that annuity, you can't expect Discover or American Express to do it for you.
Ever heard of the concept called the free rider? It's someone who benefits from a product or service without paying for it. We see it everywhere, and it's a wonderful, magical place to be in. Take Google. My company pays Google a few bucks a month for AdWords and AdSense. For every paying customer like me, thousands enjoy YouTube and Picasa and Google Maps and Voice and Earth without spending a cent. If enriching Google management (or MasterCard or VISA management) isn't important to you, be a free rider.
TV works the same way. Sure, those beer and cereal commercials might insult your intelligence. But you should thank the Bud drinkers and Rice Krispy eaters motivated by those commercials; those folks are subsidizing your TV viewing. On balance, most people vastly prefer the current scheme to what would be the only other possible way of broadcasting for profit: making every channel pay-per-view.
If you're a cardholder with a brain and just the slightest capacity for self-discipline, take advantage of the free service the credit card company offers (convenience) while forgoing the optional paid service (interest payments.)
"Sure," you say, "that's so simple. Why doesn't he tell me to brush and floss while he's at it?"
Well, it is simple. And thus easy to rationalize away.
If you already have credit card debt, then for yourself and your posterity, live the life of a Trappist monk to reduce it. A few weeks or months of bus rides and Ramen noodles now beats a lifetime of servitude.
Just in the last few months, I've heard different people lament their insurmountable credit card balances to me while they were:
- about to leave for a vacation to Switzerland and Italy
- sipping $16 cocktails at a bar overlooking the Las Vegas Strip
- debating what kind of car to buy their newly-licensed daughter.
Every last one of them was regularly signing the checks for those monster annuities — in one case, paying 24% for the privilege of incurring ever more revolving debt. Clearly, these people were already way beyond any psychological burden of owing money.
Before you plead victimhood, it's not as though the credit card companies broke into your house and hogtied you, leaving one limb free so you could sign the agreement.
People often refer to credit card rates to as "obscene" and "usurious." There is nothing obscene about sticking a price on a product. I happen to think the Chrysler 300, OpenTable common stock, and the 4000-square foot house down the street that features a swimming pool in the shape of a uterus are all grossly overpriced. My solution? Don't buy them.
But I need credit!
I need transportation, food and shelter, but I'm not going to impoverish myself to acquire them.
The most important criterion associated with a credit card is its annual fee, if one exists. Second is the spending limit, with the same qualifier. After that, look at rewards. Yours truly carries only an American Express Hilton Honors card because:
- there's no fee, and never will be;
- I stay in Hampton Inns a few times a month anyway;
- it's accepted worldwide.
How do I know there's no fee? My eyes. Considering how the wrong move with a credit card could cost me thousands of dollars, I thought it was prudent to read the agreement. Which, by the way, was in navigable English. However, it did take a few minutes, which for many people can mean cutting into precious FarmVille time.
Bringing up the rear on the list of credit card features is the interest rate. It's utterly, completely irrelevant. My issuer could raise the interest rate to 6,345,328% and I wouldn't blink.
But if you're already in debt, see the line above about the monk. Then get out a pair of scissors. For you, shifting to a low-interest credit card makes as much sense as choosing a cigarette brand low in tar and nicotine for your 11-year-old.
The mantra always holds: Buy assets, sell liabilities. Do that often enough, and you can't help but get rich. Impoverishing yourself every month with credit card debt is the very definition of a liability.
This is a guest post by Greg McFarlane. Greg is an advertising copywriter who recently wrote Control Your Cash: Making Money Make Sense, a financial primer for people in their 20s and 30s who know nothing about money. Buy the book here (physical) or here (Kindle) and reach Greg at greg@ControlYourCash.com.