Skim through the pile of junk mail that arrives at your door daily and you may see some interesting things. On one day this week, I got two pieces of mail expressing completely opposite views about credit cards.
First, in a letter accompanying some checks connected to one of my credit cards, I was told I could give myself "holiday freedom" this season. How? By using the checks, of course, for gifts, travel, balance transfers, or whatever would make the season special.
The same day, in a newsletter from a mutual fund company that specializes in Asian stocks, I learned a fascinating tidbit about credit in Taiwanese culture. Pundits there have coined the term "card slaves" to refer to people who become overextended on their credit cards and struggle to make payments.
So, which one is it? Do credit cards offer freedom, or do they lure users into slavery? Let's consider some arguments.
Freedom: Credit cards offer the flexibility to buy something today even when the dollars aren't in your pocket, or when a purchase would require more cash than you'd be comfortable walking around with in your wallet. They're a convenience, and one that's accepted at virtually every retail outlet in the nation.
Slavery: Let's say you don't have the dollars in your pocket, and you're not likely to have them next month, either. Now that same credit card becomes less of a convenience and more of an enabler, allowing you to spend beyond your means to pay. Has the credit card just made you a slave to your impulse buying?
Freedom: Use a credit card to shop and you can take advantage of "float," the roughly 20 days to 30 days that most credit card companies cover your purchases before you have to pay the bill. Your money remains free to sit in your bank account all that time, perhaps even earning interest. As long as you follow the rules set by your card and pay your bills on time, you can enjoy this float every month.
Slavery: Once you're unable to pay your bills in full, the interest equation turns against you. Every purchase costs more than it did at the time of sale. Your money's no longer earning interest for you in the bank, it's being sent to the credit card company. You're paying the interest now. In fact, you're no longer working to buy new purchases, you're working to pay for the stuff you already have. Build up a high enough balance that requires you to forfeit most or all of your disposable income to pay the bill, and suddenly you're working for the credit card company all month long.
Freedom: You almost never get asked, "Cash, check, or charge?" by a clerk at the department store anymore, but the question underlines an important fact about credit. With a credit card, you have a choice about how to spend your money. You may even have lots of choices. You can use different cards that award you different perks and cash in on rebates or points programs. You can take advantages of the extended warranties and fraud protections that sometimes come with credit cards. You can even get cards that link to savings accounts, if that's what you're after.
Slavery: Carry a balance on your card and the benefits of most of those points, rewards, and rebates is wiped out by interest payments or fees. Purchasing doesn't get you any perks, it just puts a big drain on your wallet. You get nothing back for that interest you're paying to the credit card company each month, and you're obligated to make minimum payments. While those minimum payments may appear small, paying only a little each month means your balance keeps growing, and it keeps you working to pay down your debt for months or years.
Freedom: Credit cards build credit, and credit is important for purchasing a car or a home. It can even be important when renting an apartment, applying for insurance, or interviewing for a job. The wise (or Foolish!) use of credit cards can open these opportunities to you and help you make big purchases at a reasonable rate.
Slavery: Get behind on your credit card payments and you could find yourself on the losing side of the credit market. Interest rates offered to you may be high, so everything costs you more. With really poor credit, you could be missing the opportunity to buy a car or a home. You may end up working for years to improve your credit score.
All this seems to add up to the conclusion that whether a credit card means freedom or slavery depends on the user. Credit card companies do not exist to make your life easier, though their products can. Learn some of the more fascinating things about the credit industry in the Credit Center. If you're feeling enslaved to your monthly payments, we provide a free guide to getting out of debt that will help you reclaim your freedom.
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