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The topic of credit cards brings up some of the most spirited debate on the internet regarding personal finance. Some love them; others hate them with a passion. Personally I don’t recommend using credit cards; to me it’s like playing with fire. But while I have coached individuals and couples over the years on cutting them up and closing the accounts, I’ve noticed that there is something people forget when using credit cards.
Credit cards are billed on a cycle. Typically they are every 30 days or so. So for example if your statement cycle is April 1st to April 30th and you charge $2,000 you won’t get billed that amount until sometime in May, and don’t have to make your minimum payment until the end of May. Essentially you get the use of other people’s money for 30 days free of interest charges, which is one of the ways credit cards are sold.
But what in reality are you really doing? You are essentially allowing yourself to be a month behind with your finances. What do I mean by that? Well in our example above, in the month of May while you are paying off your credit card balance, you are accumulating May’s expenses as well which will be paid in June. Then in June when you pay off May’s expenses you are accumulating June’s expenses to be paid in July, etc. In reality to get caught back up you need to pay $4,000 in expenses ($2,000 for the current month and $2,000 for the prior month) to be caught up. However, we are usually living paycheck to paycheck and don’t have the money to quit using credit cards and it feels like we will never be able to get off the credit card habit.
The fact is when using a credit card you are putting yourself a month behind with regards to paying for your expenses. Even if you pay off your statement each month you still have to pay your current month expenses on credit and it can create a big problem when trying to get rid of your credit cards.
I didn’t write this article to scare you from trying to stop using credit cards. Rather I wrote this article to make you realize that even if you are being disciplined and paying off your statement each month, unless you have the money to pay back your previous month’s expenses and your current month’s expenses, you are still borrowing money when you use your credit card. You may not be paying any interest but if you ever find yourself in a cash bind for some reason, you are going to be tempted to charge even more on your card which can lead to the vicious cycle of credit card debt.
For those of you who have successfully turned away from using credit cards, did you experience that you were playing catch-up on getting current with your expenses? How did you handle it?