Why a credit card is like a machete. - The Broke Professional

Why a credit card is like a machete.

If you take a look in the purse or wallet of any American, you will most likely find a credit card or two.  Or three.  Or more.  The problem is that while many people have credit cards, many of them do not know how to use them responsibly, or how to use them to their benefit.  According to creditcards.com, the average cardholder has almost four cards, while 1 in 7 people have 10 or more cards.  With that many cards in circulation in the country, it would be prudent for people to know why they have a credit card and how they can best use it.

Credit cards are a tool.  A machete is also a tool.  A credit card used responsibly can be a good way to track your spending and possibly earn some rewards.  A machete used responsibly can help you clear vines and brush to safely lead your party out of a jungle.  A credit card can also destroy your credit score if you are late on a payment or carry a large balance.  A machete can also be used by a crazed man in a hockey mask to terrorize unsuspecting campers.  See where I’m going with this?  A credit card can be your best friend while also being your worst enemy.

A credit card is essentially an interest free 30 day loan, with conditions of course.  The main condition is that you pay it back by the due date.  This is the problem that many Americans have nowadays, as they charge anything and everything they can and then are stuck with a bill they cannot pay off in full.  This is when the high interest rates kick in.  Credit card interest rates are regularly in the double digits.  Scary.  This can be devastating to a family trying to make ends meet.  Every effort should be made to pay off the debt.  A logical way to do this is to organize your cards by interest rate, and try your best to pay off the highest rate card first, as this is the one that will cost you more in the long run.  Credit card debt can be painful, but action needs to be taken to stop the cycle.

Now that the depressing stuff is out of the way, let’s go over some of the benefits of having a credit card.  One of the major benefits which is overlooked by many is that a credit card is a major component in having a good credit score.  As NSAish as it sounds, a company called the Fair Isaac Corporation (FICO) has full knowledge of our financial habits.  They know when we open credit card accounts, get a car loan, are late for a bill or are paying our student loans on time.  They use this information to formulate a FICO credit score which is a number between 500 and 850 and represents our risk to any company that gives us a loan.  The lower the number, the more risky you are and the less likely you are to get a good rate on a loan or even get one at all.  Have a high number, and you can get the best possible rate on a loan.  This can come into play when we get a loan for a car or a house, which many of us will do at some point.  Having a good credit score will save lots of money over a lifetime, and it is an easy thing to do.  One of the major components is how we use credit cards and if we pay them back on time.  If you never have made a late payment and don’t tend to max out your cards, you should generally be in good shape.  Responsible credit card use is not the only factor in a good credit score, but it is a major one and an easy one to achieve.

While helping your credit score is arguably the main benefit of credit cards, there are others as well.  From a financial planning standpoint, credit cards are handy because they can give you a line by line history of where you are spending your money.  With this information, it is easy to find problem spending areas and make the proper adjustments.  Another benefit is convenience.  While this can also be a drawback if taken too far, the convenience of credit cards makes them attractive as you can just pull out the card if you are short of cash or don’t feel like using cash at all.

Finally, credit cards that give you rewards such as cash back are useful as well.  These should only be used if you do not have any credit card debt and can be tailor made to your life.  If you do a lot of driving for example, a gas reward credit card would be a good choice.  If you do a lot of traveling, a travel rewards card can be helpful.  While you shouldn’t spend extra just to get certain rewards, getting something back for purchases you already make can be helpful.  I’m a big credit card rewards guy so I will definitely go in depth into these in future posts.

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Comments

  1. I love the article! I opened up a credit card after my divorce to try to start building better credit again in my own name. It was a cash back card and whatever I charged on it (I use it to pay electric bills, internet, groceries, etc) gets paid off within the same week so there’s no interest. My goal was to use it enough to have the cash back be equivalent or more than the yearly fee for the card. As long as I use it basically like a debit card (only putting on what I can pay off immediately) there’s no risk to using the card. It’s about perspective mostly. Love the blog, keep it up 🙂

    • Thanks for the comment Kellie it’s much appreciated! Yeah cash back cards can be great for everyday purchases like gas and groceries. The key is to definitely pay it off on time or the interest charges will completely negate any cash back you earned. Cash back cards usually have very high interest rates. Thanks again and keep commenting!

  2. Wow – 1 in 7 people have more than 10 credit cards? That’s ridiculous!!

    I would guess that anyone with more than 4 are using them for the wrong reasons. In the UK, at least, you can probably cover 99% of cashback and reward opportunities with 3 or less credit cards.

    Also, I love the comparison to the machete! The thought of carrying 10 machetes in their wallet might start to encourage people to use less credit cards!! 🙂

    • I agree having that many cards can certainly lead to trouble. It’s really important to be conscious of your spending because if you spend more with a credit card than you would without simply because of rewards, you’re going backwards financially. Thanks for the comment moneystepper.

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