The following is a post by MPFJ staff writer, Kevin Mercadante, who is a freelance professional personal finance blogger for hire, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.
Is there a responsible way to use credit cards? Absolutely! All you have to do is make sure that you pay off your entire balance in full each month – and on time. If you do, you will never incur any interest charges or late fees. And if you have rewards with your credit card, you can even make a little bit extra on your purchases. Good deal? Certainly.
But what if you’re one of the many millions of credit card users who don’t pay off their balance in full each month? And what if you are one of the many billions of credit card users who have accumulated many thousands of dollars in credit card debt?
You’ll need a different strategy. And perhaps the best strategy – as well as the simplest – is to stop using your credit cards and become an all-cash buyer. When we refer to cash, we’re not just talking about the currency in your wallet, but also about using checks and your debit card, since both function effectively as cash.
If you want to get out of debt, going to cash is an outstanding way to do it. Why?
You’ll Never Spend More Than You Have
When you limit yourself to spending only with cash, you can never spend more than the amount of money that you have in your bank account or your wallet. That fact alone will keep you from adding more debt to your current load, and that will hasten the day when you will finally be debt free.
There is one caveat here, and that is overdraft protection. If that in any way, shape or form translates a cash shortage in your bank account into some sort of debt arrangement – such as shifting the shortage over to a credit card account – you’re probably playing with fire. That’s just a backdoor way to spend money using a credit card or some other form of debt.
You Won’t Be Paying For Last Month’s Expenses This Month
One of the biggest reasons why people can’t get out of debt is because they’re always paying for yesterday’s debts. But when you pay by cash, you will put an end to that cycle. If you are already in debt, you have your hands full just paying this month’s expenses – adding last month’s expenses to the list will only put you little bit deeper in the hole.
You’ll Buy Less Because There’s No “Fudge”
One of the inherent problems of spending with credit cards – at least for the undisciplined – is that it is an open invitation to buy more than you can afford. In many cases, people are deep in debt because they have had far too many months in which they spent more money than they had. It’s too easy to add a few extras to the shopping cart, or to trade up on an important purchase, when you know that the extra cost will be covered by your credit card.
No Incentives to Spend
As I mentioned at the beginning, having credit card rewards can be an excellent option to have, but only if you’re paying off your balance each month.
If you aren’t, the rewards are probably functioning as little more than an incentive to spend even more money. This is the entire reason why credit card companies offer rewards programs. They’re betting that you’re going to spend more money on their credit card based on the rewards that they’re providing. In the process, you are far more likely to run up a large balance that will be subject to ongoing interest – which is the life’s blood of all credit card companies.
In short, credit card rewards are a blessing to people who pay their balance off each month, but a curse to people who carry balances.
You Won’t “Pay Extra” For Everything
This gets to the heart of the interest rate issue: when you pay by credit card – and you carry a balance forward – you’re always paying more for everything that you buy because of interest expense. Unless you can pay off your balance in full each month, you will be participating in a financial game that can only work against you, and always will.
As an example, let’s say that you buy a computer for $1,000 and you use your credit card because they are offering 2% cash back. You take the computer, and your cash reward, which means you’ve only paid $980 for the computer. So far, so good.
But if you carry that balance over the next 12 months, and your credit card charges you 15% interest, that will add $147 in interest expense to the cost of your purchase. Instead of paying $980 for the computer, you will actually pay $1,127. And that assumes that you will pay off the credit card balance in one year. If you don’t, you will incur perpetual interest charges on top of your initial purchase.
If you repeat this process many times during the year, you’ll pay more for everything that you bought with your credit card – which is exactly why credit card companies like to offer rewards.
You Won’t Be Increasing Your Debt
No matter what, if you make your purchases in cash, you will not be adding to your existing debt balance. This is critical – if you want to get out of debt, the first step is to stop adding to it. Until you win that battle, any effort that you make to get out of debt will be a losing proposition.
With Cash Your Debt Will Go Away – Eventually
Why is it so important to stop adding to your debt? Apart from the fact that you want to keep your debt from growing, you can eventually get out of debt simply by making your regularly scheduled monthly payments. That can only work if you’re not adding to your existing debt.
Credit card statements typically provide you with information telling you how long it will take pay off your balance using the minimum monthly payment. It may take 10 or 12 years, but if you make those payments and don’t add any fresh debt, you will eventually be debt free.
As those balances decrease, you’ll have room in your budget to make additional principal payments, that will shorten the time that it will take to pay off your balance. But that can only happen if you put a stop to adding new debt. And you can only do that by spending with cash.
If you’re serious about getting out of debt, it’s close to impossible to imagine doing it without becoming a cash buyer.
How about you all? Have you found this to be true? Have you or someone you know been successful in using cash to help you reduce or eliminate your debt?
Share your experiences by commenting below!
***Photo courtesy https://www.flickr.com/photos/stevendepolo/5437288053/sizes/q/
