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How to NOT Use a Credit Card

My topic of expertise is the many (unwarranted) consequences paying with different payment methods can have. Lucky for us, there is a vast literature on credit card usage. To give you an idea, spending with a credit card, as compared to cash, has been found to increase spending (Prelec & Simester, 2001; Runnemark, Hedman, & Xiao, 2015; Soman, 2003; Tokunaga, 1993), worsen spending recall (Gross & Souleles, 2002; Raghubir & Srivastava, 2008; Srivastava & Raghubir, 2002), decrease product attachment (Shah et al, 2015), reduce impulse control leading to more frequent spending (See-To & Ngai, 2018; Omar et al, 2014; Thomas, Desai, & Seenivasan, 2010), and debt accumulation (Gross & Souleles, 2002). And that's just a quick overview.


Now, despite all this research being out there, it's become increasingly more difficult not to use a credit card. One key reason for using a credit card is building up a credit score, massively increasing your likelihood of being able to obtain a mortgage or other forms of bank loans. Additionally, some online platforms only accept credit card payments, due to their safety, for both customers and seller. Often, credit card details are also asked for down payments. So completely rejecting the credit card might not be as available as an option as we (read: I) would like it to be. Knowing that, in some situations, we need to use a credit card, how do we make sure we use it right? How should you most definitely NOT use a credit card?


The first thing you need to know about a credit card is that the money isn't free. To have a balance on a credit card is to have a form of debt. In the beginning this debt may be free (0% APR credit card) as a marketing ploy. But after a while, often 6 months, this debt is no longer free and comes against the cost of an APR of 20-30%, often around the 25% mark. This means that on an annual basis, you need to pay the value of a quarter of your debt, for the pleasure of having the debt. Per month this is approximately 2% of your debt. You're paying to have money available to you. Hmmm... So don't spend money as if it's free. It's not! Although the sky might seem the limit, it's not. The limit is much sooner. Say about 2 meters from the ground. Not that impressive I'm afraid. If we leave the height metaphor behind, the limit is actually dependent on your disposible income. I don't think you should borrow beyond your disposible income for a month, especially not if you have a highly irregular income stream. Now there are obviously some exceptions to this: if the expense is an investment, say in your education, it makes sense to front the cost on the credit card, granted that this is the cheapest way to borrow the money. Do make sure to have a very clear repayment scheme when doing this! Excel is your friend. Btw, I'm not a financial advisor, just a personal finance enthusiast, so these numbers differ per person. Another NO when it comes to using a credit card refers to the minimum payment: Don't repay only the minimum payment with a credit card. Don't even look at the minimum payment. DON'T LOOK AT IT. LOOK AWAY. The minimum payment is an anchor trying to make you pay the least amount possible so you stick with the debt for longer. Why? Because you having debt is profitable to the credit card provider. Remember that interest you're paying? That's profit. The minimum payment is absurdly low. Often the minimum payment is even lower than the interest payment. This means it will take forever to pay off the credit card loan. Even if you started out with a 0% APR loan in the beginning, paying off a debt like this will take so long you'll enter much more Also don't get cash out with a credit card. There's fees associated with this action, costing you more money. Try any other way of getting cash first. Nothing illegal obviously... I've mentioned credit score before, well the one way to ruin that is to not repay your credit card loan at all. It makes you a delinquent. No joke. Don't do that. If you're really in a pickle, try to reach out to your credit card provider. Explain your situation to them, maybe you can solve the problem together. Or at least make it less severe! Another thing that a lot of people don't know is how credit card scams happen. Because I study contactless payment methods that work through NFC with an RFID chip, I do know. If you're paying with a credit card, try to avoid swiping using the magnetic strip. Any other form of payment is safer. The reason for this is that through the magnetic strip it's not just the information regarding the transaction that gets collected, it's also the information regarding your card, account and personal details. With enough of this info, the card can be cloned and your account "hacked" by someone who will soon steal all your money. When just using the chip, only the information regarding the transaction gets transferred. Good to know, isn't it?


I'm sure there's many more ways of mistreating the credit card. But these are the ones that popped into my mind. Now that we've gone through all that negativity, let's give this article a more positive spin by looking into ways of spending with a credit card that are pretty okay.

Like I said before, not using a credit card is damn hard. One massive benefit of spending on the credit card is that your purchases are insured. If you're not too sure about a seller, or a product, or there is long delivery period, put it on the credit card, just to be sure. It means you can claim back the money if something went south. Going back to everyone's favourite concept: the credit score. The best way of building a good credit score is to display healthy financial habits: using your credit card for day-to-day spending (say groceries) and always paying off the credit card debt in full at the end of each month (I'd recommend setting up a direct debit/standing order a day after you receive your wage). It means you spend within your means, know your limits and are liquid enough to repay your debts. To a bank looking into loaning you (more) money, that's sexy stuff.

Something I should have mentioned before: the credit card was introduced as a consumption smoothing device: meaning you didn't have to wait for your money (wage) to come in, and could spend beforehand. My feelings on this principle are known... but there is a positive spin to put on this: with having a credit card, you can front bulk costs, which is totally fine. What do I mean with this? Imagine two buying options for your gym subscription (or any subscription really). You either spend 200 pounds at once, or 20 pounds a month, which ends up being 240 pounds a year. There is a clear dominant option here, but lots of people aren't able to pay 200 pounds upfront. Enter the credit card. By putting it on a credit card you can select the cheaper option (200 upfront), repaying it at your own pace, which is likely higher than 20 pounds per month, preferably. Now keep in mind: this is still a NO if you know that you can't pay 200 pounds for a (gym) subscription. This is only good if you are really quite sure that you can repay the 200 pounds in several months, preferably with your next wage coming in! Btw, this also only works out cheaper if you're going to use the subscription for the full year. Which is quite questionable with a gym subscription... Context is everything! Another benefit of the credit card is that often they can be used to get cashbacks, or are part of other reward schemes, such as collecting airmiles. This can be a massive motivator for using it. If this is drawing you in, just make sure that, especially in the beginning of having the credit card, you track your expenses religiously! Don't have a payment method which we know to be "bad" without taking the necessary precautions!


Well that's it for me today. I hope I have given you a nice list of pros and cons when it comes to credit card usage. Please do let me know if there's an important aspect of the credit card that I've left out. I do try my best to represent a clear and somewhat objective picture!


Behavioural Science

Personal Finance



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