In the video below, The Motley Fool analysts Nathan Hamilton and Michael Douglass talk about credit cards, and how they can either delay securing your financial independence, or help you reach your financial goals more quickly. The advice may change how you view credit cards and manage your daily finances.
Michael Douglass: From our own Nathan Hamilton.
Nathan Hamilton: This is actually one of my tips. I was looking at it and looking over my history with credit cards, and I believe I had my first credit card around 19. My thinking as we've come full circle today is, credit cards aren't necessarily the enemy, but credit card debt is. And if you look at that, as I mentioned before, credit card companies can get a bad rep, because people do take on high-interest debt. But we also have to look at it and say, OK, for transactors, people who are paying off their balances monthly, they're not incurring interest charges, you're overlooking an opportunity if you're not taking advantage of credit cards, and you're not getting yourself into debt, and you're sticking to your budget, because, as we look at it, reaching any of your retirement goals, any financial goals, is all a combination of tiny steps forward to get you there. It's not just, all of the sudden, you have a million-dollar nest egg. It's every single action you take day to day over a 30 year period that gets you to that point. So, credit card rewards, they're not going to blow the doors off of it, you're going to get some extra money, but it's not anything that's going to change your life drastically today. But, those credit card rewards day in, day out, earned over 20 years or 30 years or whatever, that's a meaningful addition to what you could potentially invest in the future, saving money, earning money back. So, for transactors, and I think most transactors realize this anyway, they see credit cards as their friend. But, on the indebted side of it, credit card debt is absolutely not your friend. I'm not an advocate for taking on credit card debt in many ways at all.
Douglass: Yeah. When you think about your wealth, one of the fastest ways to destroy it is with credit card debt, because you're paying those really high interest rate charges, 18-20% or more, I've seen as high as 30% and I'm sure there's higher ones.
Hamilton: There are.
Douglass: High. And when you're paying that kind of cash on your cash, you're basically just blowing money out the window. So, what you want to do is get that under control and be a transactor as much as possible.
Hamilton: If you think about it from an investing perspective, which, obviously, The Motley Fool was based upon -- imagine if you could earn 20% returns for 30 years annualized. The market has returned 8% over the long-term, and we as active investors try and beat that by 1-2%, and that's considered extremely successful. Imagine if you could go from 8% to 20%. That's what's happening, when you're in debt, that's what's working against you. You're paying out that compounded interest to another party at your expense. That really puts it into perspective, and says, here's how credit card debt not only affects you right now, but delays investing and securing your financial independence for years to come.
Douglass: Thinking of it on the flip side, if you have credit card debt and you want a 20% guaranteed return, pay off that debt. Because that's basically a guaranteed way to not have to pay off that extra, and keep paying additional interest.
Hamilton: Look at it, balance transfer cards are an obvious strategy. If you search online, you're going to come across a bunch of information about it. People use those promotional 0% APR offers to pay down balances faster. Maybe they don't get the whole balance paid down during the promo period. But, it's something that people would, essentially good credit and better, can qualify for. And there really aren't many scenarios where I can see where people shouldn't take advantage of that if they do carry debt.
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