Regarding ~ CARDS
Dear Daughter,
I don’t think you realize this yet but there are two different types of cards your mom and I use to pay for a lot of things, a Debit Card and a Credit Card. Regardless of the type of card we use, the purpose of them is the same; to take the place of cash.
It is a lot more convenient to carry around two little plastic cards than it is to go to the bank, withdraw cash and carry around a bunch of bills. In addition, you don’t have to deal with coins coming back to you as change. Coins are a huge pain in the rear!
So what is the difference between Debit and Credit cards anyway?
A Debit Card is tied directly to your bank account. As soon as you swipe the card, the machine communicates with your bank then takes the money from your account and places it into the store’s bank account. This is super quick and very convenient.
A Credit Card (sometimes called a Charge Card) is a completely different deal. It allows you to pay for something without having the cash to back it up. Think of it as a way to borrow money from a bank with the swipe of a card. Want some new clothes but don’t have the money right now?
CHARGE IT!
On the surface, Credit Cards sound like a pretty good deal right? Just as convenient as Debit Cards but you don’t need to have the money?! SIGN ME UP!! Here is the problem though……you’re using someone else’s money. Now, what have you learned about using other people’s money? Yup, you have to pay them interest for the privilege.
Oh, and the average interest rate on Credit Cards is 18%! Yes, you heard me right, 18%!
Now, to be clear, you can use the bank’s money for free as long as you pay them what you owe within 30 days (one month) of your purchase.
However, according to the website money.com, 65% of people do not pay off their credit cards every month. Instead, they elect to make what is called the minimum payment. This is the amount of money the bank says you have to pay each month for what you bought. Typically it is only about 3% or less of what you actually owe.
Now, the average balance for those that don’t pay off their card every month is $5000. So that means with a 3% minimum payment, one would only have to pay $150 in the first month.
When you factor in an 18% interest rate with such a low payment you end up with a whole lot of time and money needed to pay off the original $5000.
In fact, according to this cool calculator on Bankrate.com, it will take you…….ready for this????
199 MONTHS and $4698.38 in INTEREST to pay off just $5000!
That’s 16.5 YEARS!
But you also need to consider that the majority of people with Credit Cards have, not one, but three cards. So you can see how quickly someone could get into trouble.
Trust me, I know how easy this can happen because I made this mistake in my 20’s. I didn’t understand, or care about, the math behind cards or how much money I was throwing away in interest. I figured that as long as I could make the minimum payments on my cards, I was all good.
The concept of waiting until I had the money to buy something made no sense when I could get it now with just a small payment. As a result, I learned the lesson behind Credit Cards the hard way.
So with that costly lesson learned, you are definitely asking yourself why mom and I still choose to use them. Great question!
Here is the hack! To get people to sign up for, and use their Credit Cards, the banks offer special rewards like airplane ticket and hotel discounts which are called points. For every dollar you put on your card you get a point. In fact, if you get enough points, you can actually get plane tickets and hotel stays for free!
The banks don’t care because they are making so much money on the interest that 65% of their customers are paying every month. By the way, many of these folks justify putting things on their card, that they have no intention of paying off, by telling themselves they are making their next vacation cheaper.
But because your mom and I do not carry any balances past a month on our Credit Card, we never pay any interest. We just rake in the points!! We are getting free plane tickets just buying groceries or going out to restaurants which are things we do anyway. Those vacations you have been on so far in your childhood?……..we used points on all of them in one way or another…why wouldn’t we?!
I do not recommend you do this until you are in your late 20’s or early 30’s however. The temptations to overspend are too great and your savings are not high enough to pay off those impulse purchases every month.
The simple answer to the big issue of Credit Cards is, do not apply for one until after college, when you have a good job and have saved enough to cover emergencies. If you don’t apply, you won’t get, and you won’t overspend.
PAY AS YOU GO KIDDO!
Oh, and don’t listen to the credit card offers you get in the mail when you turn 18 or the people selling them on campus at college. You don’t need to develop a “credit history” to get ahead of the game. That is a tactic used to both scare you and make you think you’re doing the right thing by getting a card. It’s a lie and a scam…..don’t fall for it!
Love, Dad
