Thursday, April 11, 2013

My Shrewd Observation on the Usage of Credit Cards

So the below gem has been recently brought to my attention, and I found it fitting to share some of my thoughts on it. The graphic below was produced by Bank of America.  BofA surveyed 1,500 of their clients between February and March of 2013. I assume that base criteria for participants to be eligible to have their voice heard was to hold at least one credit card obtained through BofA.

 I happen to find the results of this survey to be fascinating. I find it fascinating because I have not owned a single credit card for over four years. I used to believe a lot of the credit myths out there like: it’s important to build your credit score, student loans and mortgages are good debt and of course the nose in the air arrogant myth that “debt is a tool used to build prosperity.” I live my life off a zero based budget planned for at the start of every month. I use cash to make everyday purchases and write checks and use online payments for monthly, quarterly and annual bills due. So during the course of time in between that it takes for the Summer Olympic games to occur, perhaps I have lost touch with the psyche of credit card users, and probably more importantly their behaviors. So here’s the chart showcasing BofA’s findings.

Now when I started to piece together some of this information I actually started to find it rather humorous. More than half of BofA credit card users carry a balance on their card every month, nearly 9 out of 10 of them want to be rewarded with cash back while just under half want to be rewarded for responsibly managing their credit cards.

To me these numbers translate to this: Nearly everyone wants cash back on the use of their credit cards, but less than half use the cards responsibly.

Just as alarming is that more than half of users carry a monthly balance. And a third pay more than the minimum payment due, but fail to pay the balance off. Across 1,500 people, that is an awful lot of interest that is accruing and leaving the consumers’ pocket and finding its way to the fine people at BofA.

Look, I get it. Conceptually credit card users want to use credit cards for everyday purchases that we were planning to buy anyway: groceries, gas, rent, utilities, etc. And with these fixed expenses we plan, through credit cards, to put a little more coin in our pocket by getting an “easy” 3-5% back on these purchases.
“I won’t overspend.” “It will never happen to me.” “I’m going to borrow responsibly.” We all say it. Hell, even I used to say it. But statistically this is just not what’s happening out there. This study shows that we know we’re overspending, but as long as we get our “cash back” we don’t give a damn.

Well I’m telling you to give a damn. Easy access to credit through a credit card increases our likelihood of overspending. It happened to me, it’s happening to the majority of the 1,500 respondents and statistics are showing that it’s happening to the majority of credit card holders out there. BofA, Visa, MasterCard, Chase and all issuers of credit cards are not non-profit entities. They are not in the business of giving away profits in the form of “cash back.” The facts and statistics are showing that the interest paid on credit cards are large areas of profit for the lenders did an assessment based on data from the Federal Reserve that stated through the end of February 2013, American households owed $848 Billion dollars on credit cards alone. And when you factor in stupidly high interest rates north of 16%, that totals out to a lot of stupid tax.

So I made the decision 4 years ago that I’m not playing games anymore. Credit card lenders were preying on me and foaming at the mouth for me to overspend and pay interest. So I switched to a cash based lifestyle, and must say that it’s been working pretty well for me.

I don’t get 3-5% back on my grocery purchases. Instead I am calculating and intentional with all of my purchases and do not overspend in my budget categories. I prioritize saving and am currently sending 6% of my gross income to my 401k and am heaving disposable income into my brokerage account. So ultimately I’ve traded making 5% cash back on money spent for making 16% on money that I’ve saved. And you know what’s better about the latter? At the end of the day I have the money saved still with me and the power of compound interest working for me instead of spending without a plan to earn a pathetic amount in cash back and wondering why I don’t have any money at the end of the day.

I’ll end this post with one of my favorite quotes from Albert Einstein: “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t…pays it.”

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