Wednesday, April 1, 2009

Are Credit Cards for Emergencies Only?

What is the correct answer to this question?
Credit cards should only be used…
1. in case of an emergency.
2. for large purchases that you really need.
3. to prove that you know how to pay bills.

In case of an emergency – NO! I used to firmly believe this. Why build up a savings account if you have room on a credit card? If our water heater breaks or I have to make an emergency trip to see a sick relative, I can just put it on a credit card. I used to believe that it was responsible to not use my credit card for frivolous things like eating out or new shoes, and to always keep room on it for important emergencies.

The onset of this Economic Crisis has taught many of us the mistake of this belief. For many people, the emergency was losing their job! Does it make sense to add ‘being in debt’ to ‘not having income’? Of course not. Credit cards are not to be used for emergencies. That’s what savings accounts are for. You build up a savings account so you can use that money in case there’s an emergency.

For large purchases – NO! I heard a financial writer provide this logic: as long as you were buying something important that you would be using for a long time then it was okay to put it on a credit card. For example, major appliances and furniture for a new apartment. I guess the logic behind this was that it was okay to pay interest on something as long as you get some use out of it.

Yes, there are some reasons where debt makes sense. Home ownership, student loans, even auto ownership, to a point (people don’t need a new car every three years). Any other purchases, in my opinion, don’t justify going into debt. If you need something and you can’t afford it right now, you live with out it, until you can save your money to buy it. This is a radical concept nowadays in the age of I want what I want now without having to pay for it. And since most banks and stores benefit from consumers going into debt, we, as a culture, encourage it.

So if you don’t have the cash for a sofa for your new apartment – sit on the floor. If you don’t have the cash for the latest electronic gadget, use the old gadget. If you don’t have the cash to eat out a restaurant, defrost something that’s in your freezer.

To prove that you know how to pay bills – That’s it! That’s the only reason to have a credit card. If you ever want to borrow money, rent an apartment or apply for a job, there’s a good chance someone will ask you for proof that you know how to pay your bills on time. What’s the proof? Good credit. So how do you get good credit? Not from being rich. Good credit has nothing to do with how much money you have. Not from being smart, or popular, or handsome – good credit comes from showing that you can pay your bills on time every month. That means you should create a bill that you can pay every month.

Credit cards are great for that. Only charge on your credit card what you KNOW you can pay off when the bill becomes due. In my mind, groceries and gas work perfectly. Charge groceries and/or gasoline throughout the month and then pay the bill off, on time, by the due date. You will establish and maintain good credit. Someone who charges these minor things on a credit card is not irresponsible. What’s irresponsible is assuming you’re supposed to maintain a balance on a credit card.

We need to change our mentality about credit cards and debt in our society. Only then can we make it out of this economic crisis and hopefully not find ourselves repeating these mistakes!


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