When you read about personal finance one of the things you see recommended first is the idea of the snowball principle for paying off debt. This is the idea that you pay off a small debt first, and then roll your payments into another debt, and so on and so forth until you are debt-free. It’s a simple concept, and it works. One of the items you always see people talk about paying off is credit cards. This is is because credit cards in America are set up in a way that makes them intentionally hard to manage for younger and less financially stable individuals. The cards come with fun perks such as “Get $100 when you spend $1,000 in your first 3 months”. Incentivizing people to spend money they don’t have, and then penalizing them with exorbitant interest rates that make it next to impossible to ever pay off the debt.
This causes many people to forgo credit cards once their initial debts are paid. They do this out of an abundance of caution, and to avoid the pitfalls that befell them previously. Essentially credit cards leave a bad taste in their mouth, and they never bother to try them again. I am going to convince you that not only do you need a credit card, but by not having one, you are leaving incredible amounts of money on the table. In order to do this, I am going to take a hypothetical look at Bob.
Bob is a regular everyday guy. He got underneath a small mountain of debt in college, paid it off after he got his first good job, and never opened another credit card. He makes $45,000.00 per year and has a comfortable life. So, what’s the incentive for him to open a credit card? To see the value we are going to look at a hypothetical spending pattern over 10 years, and assume that due to raises/promotions, his average income is $50,000.00/yr over that span.
$50,000.00/yr x 10 years = $500,000.00
Let’s say he loses 40% to taxes, and another 5% to investments. So, he has take-home pay of roughly $275,000.00.
Now, assuming he saves 20% of that and doesn’t want to jump through hoops to pay his mortgage with a credit card (entirely possible, but often not worth it) he saves $55,000 and pays his $800 mortgage for $96,000.
This leaves Bob with a grand total of $124,000.00 in discretionary spending over 10 years' time. So, if he never opens a credit card, he gets the value of $124,000.00. Now, let’s say Bob opens a credit card, in this case, one that offers 2% cashback on all purchases, providing he pays his bill promptly each month. Bob could potentially earn $2,480.00 over 10 years.
Now, this becomes no longer worthwhile if you cannot afford to pay your bill off in full at the end of each month, or if you are not good at managing your funds between your bank account and credit card to ensure you always have enough to do so. BUT. If you can, you get hundreds of dollars a year for FREE.
This applies to cash back, rewards, travel points, and all of the other perks credit card companies offer. They are able to offer these because people who don’t pay on time continue to pay them massive amounts of money in interest. If however, you think you are financially responsible to do so, credit cards are essentially a way to generate FREE money. Tack on a cashback site, or local grocery rewards and you could be looking at 3–5% cashback on most of your spending. While it’s not a life-altering amount, it’s enough to buy you a few nights out, or maybe that new fishing rod you have been eyeing.
Credit cards are something that every financially responsible person should own. They allow you to protect your bank assets and generate some additional returns on the side. If you haven’t taken the leap or swore off credit cards for one reason or another, it might be time to take a second look and evaluate if the potential rewards are worth it for you.
Please Note: This is not financial advice. Credit cards can be a major pitfall if you get stuck in the interest trap. In order to benefit from using them, you need to be financially responsible enough to manage your spending and not go into debt.