"The only reason a great many American families don't own an elephant is that they have never been offered an elephant for a dollar down and easy weekly payments."
Checking the mail, I notice another letter from a credit card company. I know there’s not a credit card inside because it’s too light. I open it up to see a rejection. I can’t get a credit card, not because I have bad credit, but because I have no credit. It’s frustrating for me because I’m caught in a loop; I can’t get a credit card because I don’t have credit, and I don’t have credit because I can’t get a credit card.
Fast forward a few years and I now have a dozen credit cards. Every time I see a credit card that offers some kind of reward - some kind of cashback or a 0% offer - I apply...and get approved. Before I know it I’m opening credit cards simply to transfer my balances to. Unfortunately, I don’t have the self-control to stop using the card that I just transferred over to the new card. I’m in college going to class full time so there’s always a need for just a little bit more cash.
That was almost 20 years ago, but the lessons are still with me. Credit card companies aren’t your friend; they want to make money from me. Any “perk” that I sought was merely meant to get me to open up (and use) more lines of credit. I was able to escape the debt cycle, but many struggle. Debt is limiting and not something to take lightly.
Different Types of Debt
Debt comes in all shapes and sizes. The more common types of debt that you have are a mortgage, home equity loan (formerly called a second mortgage), car, boat, RV loan, student loan, and credit cards. Some debt, like a car loan, is a one-time transaction where someone gives you money and you agree to pay it back over time with interest. Some debt, like a credit card, where you get a certain limit and you can spend on that limit as you go. Some debt has a fixed interest rate, where the interest rate (effectively, the price of the debt) is fixed and doesn’t change. Some debt has a variable interest rate, where the interest rate changes over time - both up and down.
In the past, debt has been used as a way for young people to smooth their consumption over time - that is, when they come out of college they don’t make much money but their salary will rise over time. Consumption-smoothing helps people buy things now when they don’t have a lot of money and pay it back over time when they have the money to pay it back. That has evolved with the rise of consumerism to allow people to acquire things they can’t afford.
For this post, I’ll mostly be referring to credit cards, but most of what I talk about applies to all forms of debt.
Debt is an Investment...for the Creditor
It’s helpful to understand debt by thinking of it as an investment. When someone gives money to someone else, they are investing in that person or entity, and they expect a return. That return is an interest rate. In other words, lending is the opposite of borrowing.
For example, if you need (or want) access to money, someone (a credit card, for example) will invest in you. They give you the money, but since they now don’t have access to their money they expect a return on their investment, i.e. interest.
Most of us think we only play the role of the borrower, or debtor, but you play the role of lender whenever you invest in bonds, buy CDs, or simply put your money in a savings account. You give your money away with the expectation that you’ll get that money back with interest. The more stipulations that come with the investment (e.g. you can’t get your money for six months or one year), and the less likely it is that you’ll get your money back (e.g. you invest in the bonds of companies that are struggling), the higher interest you need to compensate you for the risk you are taking.
The same is true when you are borrowing money. If you are deemed to be less likely to pay the money back, the person or entity giving you the money will expect a higher interest rate to compensate for the risk they are taking.
Sometimes Debt Can Be Good - For Some People
There have been countless articles touting the benefits of using credit cards (usually by bloggers who get paid a commission). Some of the benefits of using credit cards are that there are some benefits you get around fraud protection and warranties. For many, it’s easier and safer than carrying cash (though this benefit also applies to debit cards). Finally, the most touted benefit is the rewards you can get. Some credit cards give you cashback, some give you airline miles, some give you hotel points, and so on. Used properly, you can get some pretty good perks by responsibly using credit cards.
But there’s a reason credit card companies offer these perks.
Downsides of Debt
When we use credit cards, we lose the pain of paying. That is, we don’t have to feel that we are getting rid of our money. Back when people used checks, we had to write the amount we were spending three times - once in number-form, once in written-form, and once in the register. When we use cash we have to physically part with our money. None of that happens with credit cards. We don’t even have to sign most of the time. Sometimes we just touch our card to a machine, and sometimes it’s done with our phones. All of this is sold to us as a convenience, but the true reason is to make it easier to spend.
When it’s really easy to spend, it’s easy to spend too much and end up with debt. Having debt means we owe someone money; we lose financial freedom, flexibility, and peace of mind.
Creditors Make Debt Feel Special
Credit cards are a good investment for bankers. Credit cards can have interest rates that climb above 25% per year! When people find a good investment they look for more and more opportunities to invest.
What you’ll find is that getting access to credit will be framed as a perk; something that makes you special and unique. You’ll hear things like “Look how much you are approved for!” or “This is incredible; you’ve been approved at the platinum level!” This eases your guard and makes you spend more. It changes the discussion because you’re no longer thinking about going into debt, having to pay money back with interest, and instead makes you feel like you deserve to treat yourself.
Increasing Your Awareness of Debt
We have to understand what it means to take out debt, to owe somebody money for something we want to buy. We have to understand the difference between buying something now with debt and owing interest and saving up for something while earning interest.
After we begin to understand better what it actually means to go in debt to buy things, we can start to think about our spending with more intention. One tip is to reintroduce the pain of paying. This brings our spending back into our conscious awareness. This can be as simple as writing down every purchase you make. Alternatively, remember to get a receipt for every purchase and as you look at the total, say to yourself, “you just spend $x on y, isn’t that interesting? The point here is not to judge yourself. You aren’t asking why you spend that money or wondering what it means that you spent that money. It simply means that you are making yourself aware of your spending - which is what retailers and credit card companies work hard to strip from you.
Another mental trick you can use is to start becoming aware of when you are using debt. When you reach for your credit card, imaging having to go into a loan officer’s office and justifying the purchase you are about to make. Remember, using your credit card to buy something is the same as taking out a loan to buy it. How would you justify to the banker that you need a loan to buy some clothes? What reason would you give for not wanting to instead wait until you had the money in the bank? Using credit cards makes it easy to hide what we’re actually doing - taking out a loan to buy something. Using this thought experiment forces us to confront this reality.
Increasing Your Self-Awareness
Additionally, you could go upstream even further. Instead of imagining yourself talking to a loan officer, ask yourself why you want to make this purchase. Further, why do you think it’s worth going into debt to make this purchase? Is this an impulse purchase or are you making this purchase with intention? How will you feel tomorrow? How will you feel when the credit card bill comes?
Understand the “why” behind your purchase will help bring you face-to-face with the real reason behind your purchase.
Explore Your Money Scripts
Money scripts are subconscious beliefs about money that drive our financial behaviors. If there is a spending behavior you want to change, you might want to consider exploring your money scripts. A money script can be any rule that you blindly follow, but they generally fall into four categories, three of which may impact your use of credit cards and going into debt. Money Avoidance money scripts are generally beliefs that money is bad, or people who have money are bad. If you hold onto these money scripts and also have money, you may be subconsciously getting rid of your money because of what you perceive it will do to you if you keep it. Money Worship money scripts are typical beliefs that more money will make your life better. The belief that money buys happiness or the belief that possessions will bring us happiness fall into this category. Using credit cards to buy stuff because you think it will bring you joy and happiness is a sign that you are being driven by one or many money scripts in this category. Money Status money scripts are generally the belief that money should be used to signal your status. If you use your money to buy the latest and greatest gadgets, not because of the perceived happiness they will bring you (as those would be Money Worship money scripts), but because you want to be seen as the person with the best stuff, then it is likely you are driven by these money scripts.
Only after understanding your money scripts can you change the beliefs and thus change your behavior and outcomes.
Credit cards (and other forms of debt) can be a good tool if you use it properly, have the requisite self-control, and use it with intention for a specific reason. Otherwise have far better Money Health if you stick to cash and debit cards while saving up for larger purchases.
You only have one life. Live intentionally.
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Related Money Health® Reading
References and Influences
Hidden Brain: Buy, Borrow, Steal
Brad Klontz, Ted Klontz: Mind Over Money
Brad Klontz, Rick Kahler, Ted Klontz: Facilitating Financial Health
Ramit Sethi: I Will Teach You to Be Rich
Note: Above is a list of references that I intentionally looked at or thought about while writing this article. It is not meant to be a definitive list of everything that influenced my thinking and writing. It's very likely that I left something out. If you notice something that you think I left out, please let me know; I will be happy to update the list.
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