Dear daughter,
Having a credit card can be another way of having debt. And if you are not disciplined, it can be very bad for you.
Do you need a credit card?
Short answer: you don’t need a credit card!
Can you have a credit card? Yes, you can have a credit card.
Let me expand on my answers.
Using a credit card is another way of using the money you don’t have.
How does it work?
A financial institution gives you a credit card, with a credit limit you can use. Usually, the credit limit, or the money you can use, is determined proportionally to your earnings or the perceived ability you have to pay back the credit. In other words, you are taking a debt that you should pay in a short term, at least if you don’t want to pay a lot of interest and penalty fees. Is this debt worth it? Is it good or is it bad?
Most credit cards have a reward program. When you buy with your credit card you might get a discount, a cash-back reward, or if you buy a flight ticket with your credit card you can get travel insurance at no extra cost.
Also, there is usually a time limit for you to pay back what you use and not have to pay interest on the amount you used.
For instance, if you use $500 and you pay back within the time limit specified in your credit card contract, you just pay the $500. But, if you take longer to pay, then you pay interest on the amount you used plus the $500.
This means that if you use a credit card, and you are disciplined enough to pay every month, you won’t have to pay any interest or penalty fees.
So, if you have the money to pay every month on your credit card purchases, why have a credit card?
It does not make sense, isn’t it?
Some people argue that this way, you will be using other people’s money (OPM) instead of yours. For me, this is just a bad reason, in the end, you still must pay using your own money.
Others argue that you get some cash back from your purchases. This is true, I experienced it myself. However, the amount of cash you get back is a small percentage of what you spend. Here, you can find yourself trying to spend more money so you can get more (a small percentage of what you spent) cash back.
Yes, my daughter, they do it like that because they want you to spend your money.
That is the business of most financial institutions, they need you to spend money so they can make a profit.
The worst that can happen when you use a credit card is that for some reason, you don’t pay what you used from the credit, and you keep using more credit. In the same way, that compound interest works in your favor when you invest, it also works against you when you owe money. You will end up paying far more interest than the amount of money you used from your credit card.
As the say goes, it is not about how much you make, but about how much you keep.
So, what do you think? Is a credit card for you or not?
Love you, Dad.