You have to have a credit card right? Maybe not. Like I mentioned previously, the credit card is one of the most marketed consumer products in history. Look at the skyline of any major city and you’ll most likely see at least one building with a Visa logo. Why do you use a credit card? If you’re like most people, you use it to buy things you can’t afford and keep up with your neighbors. Now, you might be in the minority that pays it off and never accrues any interest. That’s good, but I guarantee you impulse spend more than you think. Maybe you get points or miles. Again, that’s nice but in the grand scheme of things you’re probably making bad strategic decisions in order to justify those points…no wealthy person you’ve heard of ever got there with Aeroplan and you would have to spend $100,000 to get $1000 back on a 1% dividend. $1000 per year is $83 per month…who cares.
How do credit card companies make a profit? A portion comes from charging vendors a fee to use the system, but interest payments make up a larger portion. Think of it like this: if you were on the board of directors at Visa and a points or dividend system was proposed, but it reduced your bonus for the year, would you do it? They employ teams of psychologists and other smart/creepy people to the point that you are not smarter than Visa. They are a business, not a charity (look up the definition of a loan shark…) More people are harmed by credit card debt than are saved by points.
I would encourage you to research a marketing term called ‘friction’. It’s basically a measure of how easy it is for a company to collect your money. Back in the day, when McDonalds began to take debit cards, their profit margins exploded. Apple Pay and other NFC payment protocols are a huge profit maximizer in the vending machine industry. Studies have been done with consumers who pay cash vs using plastic. When you buy shoes with cash, a feeling of loss is created as you hand over the money. When you use plastic, they hand you the shoes and the card back and the loss is non-existent.
So what is a better alternative? I recommend a Visa debit card. It will do almost anything a credit card does except get you in debt. I use mine for online purchases as well as in the US and Europe all the time with no issues. I will give you that some hotels and many rental car agencies won’t accept it, but many do if you ask and make sure they run it as a credit card not a debit. You’re using the Visa network to access your bank account. What about fraud? You might hear talks from Frank Abagnale (the real-life character in ‘Catch Me if You Can’) talk about only using credit cards. His reasoning is that if the card is compromised, the thief takes Visa’s money not yours. Visa debit cards as well as Interac (a Canadian money transfer system) have the same zero-liability policy a credit card does. What this means is that if money is fraudulently taken out, the company reimburses you, then does an investigation. It happened to me and everything was fine.
What about credit scores? It is true that credit card use is the largest factor in raising your credit score, but why do you need a credit score? You only need it to borrow money so you can pay it off and borrow more money and pay it off and then borrow even more money…Remember that we save up and pay cash for cars and couches now so that argument doesn’t hold up. What about mortgages? If you can show you have a steady job, paid utility bills on time, have no debt and have a down payment, you will be in a position to get a mortgage (stay tuned for an upcoming segment on buying homes.) Think about this: if an apartment complex requires a credit score to rent, but you’ve never had a credit card or borrowed money but had 5 million in the bank, you could buy the building but not rent a unit. Doesn’t really make sense does it?
Bottom line, if you can’t afford to pay for it now, don’t buy it. Get out of debt as fast as you can and save up an emergency fund for emergencies. Having a real emergency is a bad time to get into debt at 18% interest.
marksdailydollar.com 