Over 35% of Consumers Get a Credit Card for the Wrong Reason
by Lyle Daly | July 1, 2019
As useful as credit cards can be, they can also tempt consumers into making poor financial decisions. After all, it's easy to overspend when you have a high credit limit and can make low minimum payments on whatever you borrow.
According to our research, consumers aren't just getting roped into overspending; many of them specifically get credit cards to make purchases that would otherwise be out of their price range. Let's look at how common this practice is -- and why it's one of the worst ways to use your credit card.
Making expensive purchases is a popular reason to get a credit card
In our survey on credit card habits, we asked consumers their top reasons for getting a credit card, and 35.9% of respondents said that one reason was to make purchases that they otherwise could not afford.
While this wasn't the most common reason to get a credit card, it was one of the top five, which is a sign that many consumers see credit cards as a reasonable way to finance purchases and pay them off later. This couldn't be further from the truth.
Why you shouldn't use your credit card for purchases you can't afford
There are two reasons why you should avoid ringing up a balance you can't afford on your credit card:
- You'll pay interest, and credit card interest rates tend to be high.
- You may develop a bad habit and get yourself further and further into credit card debt.
When you put a purchase on your credit card and don't pay it off by the due date, your credit card company can start charging you interest. At that point, you're essentially paying extra every month on top of the product's original purchase price. And with credit cards, you're looking at an average interest rate of about 18%.
That's why you should always ask yourself: Is it really worth paying more for a product just so I can have it now?
And we rarely stop at one purchase, either. Once you charge one purchase you can't afford on your credit card, it's easy to justify another, and another.
You may think that won't happen to you, but our research found that 60% of consumers had credit card debt, and the average amount among them was $5,937. Most people don't suddenly decide to charge $6,000 they can't afford to their credit card. It happens gradually, with cardholders sinking deeper and deeper into debt.
What about 0% APR cards?
The lone exception to the rule above is 0% intro APR cards. If you need to finance a purchase, then these cards are a smart way to go about it, assuming you'll be able to pay off your balance within your card's introductory 0% interest period.
That being said, I'd recommend thinking long and hard about whether it's a purchase you absolutely need to make. Even though you can finance it without paying interest, you'll still be taking on debt. And if some financial curveball should make it impossible for you to pay off the balance before the 0% interest rate expires, you could be hit with huge interest charges on your outstanding debt.
How to build smart spending habits with your credit card
If you've put purchases you can't afford on your credit card before, then it's important to change your spending habits. That's obviously easier said than done, but it's something anyone can accomplish. You just need to switch from a spender's mindset to a saver's mindset.
Spenders buy what they want and then figure out how they'll pay for it. Savers put money away first and then pay their expenses with their savings.
I used to be firmly in the first group, so I know what it takes to change how you operate -- and what a challenge it can be. Here's what I found works best:
- When you're feeling tempted to splurge on something you don't need, give it a few days. You'll be able to evaluate it more logically than you could when the impulse first arose.
- If you don't have enough money in your bank account to buy something, then don't get it. Don't rely on the faulty logic of "I'll have the money by the time the credit card bill is due," because you'll also have more bills to pay then, too.
- Consider the long-term effects of your spending decisions. A $1,000 purchase on your credit card could cost you hundreds of dollars more if it takes you years to pay off.
- Make a budget that breaks down how much you'll spend on necessities, how much you'll save, and how much you'll spend on "wants." Keep track of every expense and don't go over your discretionary spending limit.
Using your credit card correctly
There are plenty of benefits to using a credit card. It can boost your credit score. It can help you keep track of all your spending. And many of the top credit cards have a long list of perks, such as rewards and purchase protections.
What ultimately makes the difference in whether your credit card helps you or hurts you is how you use it. To get the most out of a credit card, you need to pay the bill in full every month and not consider it your ticket to purchases that are out of your price range.
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As long as you pay them off each month, credit cards are a no-brainer for savvy Americans. They protect against fraud far better than debit cards, help raise your credit score, and can put hundreds (or thousands!) of dollars in rewards back in your pocket each year.
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