DISCLAIMER: I am not a financial advisor and this should not be taken to be financial advice. You should consult a financial professional for advice. I am a financial amateur. These are my thoughts and opinions on money that I have recorded here for my children, with the hope that my thoughts might help them. They are responsible for the results of the advice they choose to follow. Always worth keeping in mind: Past performance is no guarantee of future results. Your mileage may vary. The map is not the territory. Keep your eyes open. Smell it before you take a bite.
To my children:
People spend more money when they pay with credit cards than with cash. So if you’re trying to spend less money, don’t use a credit card at all. Credit cards are convenient, though, so you might want to use them for convenience. And some of them even pay you cash back, turning a $100 purchase into a $99 or $98 purchase. So you might want to use a credit card.
If you pay off your credit card bill balance in full every month and don’t carry a balance to the next month, then it’s pretty similar to cash or a debit card.
If you don’t pay off the whole balance and just make a partial payment or the minimum payment due, then you will have to pay that money back later, plus interest. The interest part is very important because it’s very high (often at least 15% annually) and it compounds, which means you’re not just paying 15% on the purchase you made, you’re paying 15% of the interest that you owe too.
You’re trying to stay above sea level. You’re trying to build a house from the ground up. Using credit cards and accruing debt is like building your house on quicksand. Don’t do it. Since the interest you owe compounds (builds on itself), it’s worse than quicksand that sinks at a constant rate. It’s like quicksand that sinks faster and faster the longer you stand there. Get out of there! Now.
If you buy something that costs $100 but don’t pay off your full credit card balance immediately and instead wait a year, then because of the interest, that thing you bought will cost you $115 instead of $100. Wait two years without paying any of it off and it will cost you $132.25. (= $100 x 1.15 x 1.15) That’s the quicksand you’ll sink into. The thing that you thought cost you $100 can end up costing you a lot more.
Bottom Line: You would probably spend less if you always paid cash and didn’t use a credit card at all. If you do use a credit card, then use it for convenience only (and not for credit) and pay off the full balance every month, or you will end up owing a lot more for your purchases. Find a credit card that pays you cash back.