Since we are now safely past the sappiness of the day, it’s time for some Financial Mom tough love. Valentine’s Day, in all of it’s romantic glory, is also a time when many people use credit cards to shower their significant other with gifts they otherwise couldn’t afford. But hey, at least their heart’s in the right place, right? WRONG!
It’s become such a societal norm to swipe your credit card on a whim and worry about the payment later, that it’s nearly impossible for many people to completely avoid credit card debt.
However, the reality is, once you’ve started down the slippery slope of credit card debt, it’s hard to stop. This is precisely why it may be easier to go cold turkey and stop using credit cards altogether.
Not convinced? Let’s have a frank conversation about credit cards and allow me to disprove all the excuses you may have.
But I get free XX,XXX (miles, points, cash, etc.)
If you’d like to see just one example of a successful marketing campaign, look no further than the credit card industry. They are experts at creating rewards programs that target just about anyone -- no matter your interests.
On the surface, it might seem appealing to earn thousands of points or airline miles for purchases that you were already planning to make, but take a moment to think about how much you’re actually paying for the ‘privilege’ of earning these rewards.
Besides the fact that you have to spend a significant amount of money just to earn the benefits, are you also paying an annual fee? If so, how does the cost of that fee compare to the rewards you receive? To put it into context, let's say the annual fee on your credit card is $100, but they offer 3% cash back on purchases. To justify your annual fee, you would need to make around $3,500 per year (or roughly $291 per month) in purchases. Hardly a benefit, if you ask me.
One client asked me: So do the miles I get justify the money I overspent to get them?
But that's not all! What about your interest rate? If it’s higher than 0%, your rewards aren’t free. In fact, with average interest rates hovering around 15%, you’re probably paying a premium just to receive them.
Finally, consider how often you actually use the miles, points, etc? If your answer is rarely, chances are you’re paying the credit card company far more than the perceived value you’re receiving.
It’s OK - I pay it off every month
This would be great - except you don’t actually pay it off every month. No matter how well your intentions, life happens and sometimes that means the balance you planned to pay off month-after-month grows to the point that simply making the minimum payment looks like a better option.
One challenge that I often see is in the follow-through of what people intend to do versus what they actually do. The problem is, it’s much harder to stick with our intentions than we initially think. So just be honest with yourself! If you know that if you lack the discipline to budget, then you may have problems paying off the credit card each month, too.
I only use it for emergencies (or it’s my emergency fund)
Credit cards make awful emergency funds. Why? Because, while the intention may be to use them as a safety net to cover unexpected -- but important -- expenditures, their accessibility makes it easy to confuse a minor inconvenience with an actual emergency.
A broken water line at home or bald tires on the family SUV are inconvenient. Ideally, you should save up ahead of time in an 'Operations and Maintance' account to deal with these emergencies. And by the way, the arrival of the new iPhone does not constitute an emergency purchase.
Having a true emergency fund -- meaning cash on hand the equivalent of three to six months expenses -- provides the peace of mind that you have the ability to cover unforeseen expenses without blowing your budget or going into debt.
While we’re on the subject, it’s important to note that even if you aren’t using your credit card for emergencies, your emergency fund could still be negatively affected.
Consider this. If you charge all your expenses this month and pay for them next month, you are digging a hole. You are always one month behind, and this impacts your emergency fund needs. If you have three months worth of expenses in the bank and lose your job, you really only have a two month cushion since you have already spent next month's money. Ouch!
Using credit causes your Financial Tower to topple. How are you going to build up your finances if you are constantly filling in a ‘hole’ of debt? You can’t.
Get rid of the credit card mentality and focus on spending only the money you have. Sometimes this means telling yourself 'no' and 'not now'. This means saving money for your purchase ahead of time.
An alternative (if you just can’t let it go) is Debitize. This program allows you to use your credit card and funds are automatically transferred out of your checking account to pay for the purchase. It keeps your budget in ‘this month’ and prevents you from missing payments so you can still get those miles. Again, this works well only if you have your budget in order already.
Moms love you and want the best for you, so sometimes we have to say 'Cut it out!'. I want the best for your budget, even if that means some tough love. If you're having trouble getting your financial house in order, I'm just a phone call away! Click here to schedule a complimentary meeting where we can discuss your situation in detail and create a plan to get you back on track!
Pamela J. Horack, CFP® of Pathfinder Planning LLC provides personal financial planning advice and asset management for a simple fee to young adults and working families in North and South Carolina through group classes, one-on-one planning, and ongoing advice.