I remember nearly 25 years ago a friend dropped me at a car rental at Orlando Airport. I wanted a car to go down to Miami; I was flying to Cancun in Mexico later in the day. I was asked for a credit card. I said I had plenty of money and would pay cash. I didn’t have a credit card even though I had been working for many years by then. Cash was not acceptable initially until I showed them my airline ticket. I got the car with a warning that if it was not returned to their Miami office by a certain time the FBI would be on my tail.
The reason seems obvious now. A credit card was a combination of identity card and the company’s insurance that I was not going to drive off over the USA a bit like Thelma and Louise did in the film of the same name. There are many questions relating to how people use credit cards and what benefits they have brought to their users and the companies that accept them for payment. The answer to the question pre-recession is certainly different from the one that many would give today. Credit Card Companies were throwing credit around before the recession came, and lots of people were happy to take it.
Things have changed. Cards are still very convenient, but used irresponsibly can still create all kinds of problems for their users. Many people use to have a number of credit cards and spent up to their limits on each; they simply got another and paid the minimum monthly amount on those where their credit was finished. The minimum rarely knocked anything off the outstanding balance when interest was added.
While a consolidation loan could sometimes pay off the balances often, they merely added to the amount of money people were spending each month to keep afloat.
Financial institutions often looked at students as their future customers and offered incentives for them to sign up for a credit card. Suddenly they had something on their hands that they could use to spend on anything they wanted up to the approved limit. The problem was not confined to young students; everyone was tempted and generally everyone was accepted and given a card.
Things have changed, but there is still a level of temptation with that little piece of plastic. There are some rules that everyone should follow for getting the convenience of not having to carry cash. Most are obvious but often forgotten. A credit card is not free money; interest will be charged on outstanding balances making that bargain purchase more expensive than it seemed.
Anyone signing up for a credit card needs to use it sensibly and know exactly the terms and conditions under which the card has been issued. It is essential that the card is used in such a way that the convenience is a definite advantage, and there are no downsides. It is important that users are never late with their monthly payments and that the expenditure that is going on to the card is included in any personal budget that the user is supposed to be following.
Budgets that are artificially supported by a credit card are quite dangerous. Everyone can meet their monthly bills while building up an increasingly large balance on a credit card. The day of reckoning will come in the end, and it will not be pleasant.
I got a credit card shortly after my Orlando experience; it is convenient, but it demands discipline.
Steve Smith is a retired financial director living on the wonderful Turquoise Coast of Turkey. He has seen many wonderful places in every Continent of the World. He is a Graduate with Honors and since retirement has been writing professionally for a range of business clients either side of the Atlantic for four years.
Picture by Tax Credit