Credit cards can be a great tool, but they also carry some hidden costs that you should know about. We’ll talk about that on this Faith and Finance. <ul><li>Proverbs 22:7 warns us, “The rich rule over the poor, and the borrower is the slave of the lender.” Is that anywhere more obvious than with credit cards?</li><li>And <a href="https://www.pymnts.com/credit-cards/2023/gen-z-millennials-use-credit-cards-30-more-than-the-average-cardholder/">recent surveys</a>show that nearly half of credit card holders in the U.S. carry a balance from month to month. With the average interest rate now at just over <a href="https://www.forbes.com/advisor/credit-cards/average-credit-card-interest-rate/#:~:text=The%20average%20credit%20card%20interest%20rate%20is%2024.12%25%2C%20according%20to,financial%20products%E2%80%94credit%20cards%20included.">24%</a>, it’s easy to see the cost of not paying off a credit card in full every month. </li><li>But let’s say you use a credit card for much of your monthly spending, racking up rewards points, but paying off the balance faithfully each month. Are there still costs that may not be as obvious? Well, it turns out the answer is, yes. That’s due mainly to psychology.</li><li>THE SPENDING RISKS OF PLASTIC</li><li>Studies have shown that folks using credit cards tend to spend 10-30% more on purchases than people using cash. The psychology there is that it’s more difficult to part with actual dollars than it is to swipe a credit card.</li><li>On the other hand, using a credit card makes it easier to not only spend more, but to leave larger tips for services, and to buy things on impulse, which you’re a lot less likely to do if using cash.</li><li>Now, keep in mind that the tendency to spend more with a credit card applies even if you pay off the balance each month and stay on budget. That means you’re having to pull money from other categories in your budget, and more likely than not, it’s the savings category that will suffer. So you’re not carrying a balance, but you’re not getting ahead, either.</li><li>Here’s a bit more psychology. The <a href="https://academic.oup.com/jcr/article-abstract/42/5/688/1857957?redirectedFrom=fulltext">Journal of Consumer Research</a>reports that you’re more likely to increase your connection to something you’ve purchased if you use cash instead of a credit card. That seems to make sense— the more difficult something is to acquire, the more you value it.</li><li>So the lesson here is that the more susceptible you are to making off-budget, impulse purchases, the more you’ll benefit by not using a credit card and paying with cash instead.</li><li>Now, we talked about how using a credit card may increase your spending even if you manage to stay on budget, but that will be more difficult to do if you use plastic instead of cash. </li><li>Use of a credit card can make it more difficult to know whether you’re staying on budget for the month. </li><li>Of course, if you use the <a href="http://app.faithfi.com">FaithFi app</a> to set up your budget and track your expenses, you’ll know in real time if you’re staying on budget or not. It actually has a digital form of the tried and true envelope system to stay on top of your spending.</li><li>BAILOUT TRAP</li><li>There’s another potential hidden cost to using a credit card.It’s the tendency to use it as a crutch— a “bailout” when things go bad. That can turn a one-time, isolated problem into a long-term, recurring debt..</li><li>If you have the mindset that your credit card will save you if you lose your job, or you have a major medical issue, or a car wreck, then you’re not going to save for those unfortunate events ahead of time. And those things always happen, sooner or later.</li><li>EMERGENCY FUNDS</li><li>If you have an emergency fund with 3 to 6 months of living expenses in liquid savings, you’re prepared for the worst. You’ll have the cash you need to weather whatever financial storm comes up.</li><li>Without it, you have to rely on a credit card or some other type of borrowing, which means you’re automatically in the hole and now you have to dig your way out, paying interest all along the way.</li><li>So if you don’t have an emergency fund in place, start saving today. Set a goal of $1,500, then 1 month’s expenses, then two, and so on until you have at least 3 months' worth.</li><li>So, those are the hidden costs of using a credit card. We’re not saying you should never own a credit card. Just be aware of the impact it can have on your budget, even if you pay it off in full each month. </li></ul>On this program, Rob also answers listener questions: <ul><li>How do you determine whether to sell the home of a deceased parent? </li><li>How can you help a close friend who doesn’t handle money well? </li><li>Do you have to pay tax on any debt forgiven by a debtor for past medical bills? </li></ul>Remember, you can call in to ask your questions most days at (800) 525-7000. Also, visit our website at <a href="https://www.faithfi.com/">FaithFi.com</a> where you can join the FaithFi Community, <a href="https://faithfi.netviewshop.com/donate2">and give </a>as we expand our outreach.

FaithFi

Faith & Finance is a daily radio ministry hosted by Rob West. The program offers a practical, biblical and good-natured approach to managing your time, talents and resources.

Faith & Finance with Rob West

Credit cards can be a great tool, but they also carry some hidden costs that you should know about. We’ll talk about that on this Faith and Finance.

Hidden Costs of Credit Cards

FaithFi: Faith & Finance | Jun 1, 2023

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Where Faith Meets Finance

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