Credit cards not the problem

If you are a young adult (Millennial or even the new Generation Z), changes are you have heard much advice concerning your finances.

“Pay yourself first” (socking away money for the future)…”Invest long-term” (don’t worry about the market and economic swings)…”Don’t throw money at things that depreciate” (buy a home rather than a fancy truck)…”Don’t spend more than you earn” (not always possible, but attempt to avoid debt).

You might have also heard this piece of “wisdom”: Avoid credit cards.

This is true in some cases – and total hogwash in others! In fact, a smart person can make credit cards into a financial savings plan.

In the first place, it’s difficult in today’s society to travel without a credit card. Hotels usually demand them upon registration to cover incidentals as an example.

Of course, if you can’t handle credit, you shouldn’t use one. A credit card is not “free money” and it can be dangerous for those who seek instant gratification.

But the majority of people can control their spending. They are not going to buy a $500 purse simply because it’s on sale for $450. For this large group of responsible adults, the credit card is a valuable tool – an interest-free loan for as much as 30 days. Put another way, you can use someone else’s money at no cost as long as you pay it back in three or four weeks.

A credit card is not “free money” and it can be dangerous for those who seek instant gratification

And now for the added bonus: most financial institutions offer “rewards cards” allowing you free airline travel, complimentary hotel stays, or “on the house” restaurant meals. How simple…Use someone else’s money, pay it back in a relatively short time, and eat a free King Crab dinner at the Red Lobster, or fly free on Delta airlines for a New York City adventure.

Who pays for these rewards? The banks and credit unions pay for some of it, but they also have a partner in giving you these perks – the people who don’t use rewards cards.

The Wall Street Journal recently reported U.S. households that don’t pay with these credit cards lose an average of $50 a year while households who do gain an average of $240. I assume each of you would stop and pick up $240 if you saw it on the sidewalk, so it’s silly to think the savings is not worth your time or effort.

Some economists say the merchants pass on the extra costs of paying credit card fees to the customer. But even if that is true, costs will then go up for everyone – but only those collecting rewards will receive the benefits.

Again, this scenario doesn’t work for those who spend too much and cannot pay off their credit card bill in fully every month. A free dinner pales in comparison to the high interest rate attached to credit card bills that carry over from month to month.

In the worst case scenario, between 2% and 5% of credit card borrowers declare bankruptcy. They shouldn’t have a credit card and neither should the millions more who are wallowing in credit card debt.

But that’s not the reason to avoid credit cards any more than you avoid driving because some idiotic drivers are on the same freeway. Credit cards are not the problem, and in many cases you are tossing money away by ignoring them.

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