ICFE eNEWS #16-33 - September 2016
View this eNEWS online

What Smart People Know About Credit Cards

By Jim Garnett, a/k/a Ask Mr.G, a member of the ICFE's Board of Educational Advisors

Smart people know something about credit cards that the rest of us need to learn. The knowledge of this one fact results in smart people using their credit cards differently than the rest of us.

So, what is it that smart people know about credit cards that we need to learn? Simply stated: "When we use a credit card, we are not spending money, we are borrowing money."

Because credit cards are such a convenient way to buy things and because we use them so often, they seem like they are another type of "money." Most likely, this is why they are occasionally referred to as "plastic money."

To illustrate to high school kids that this is an illusion, I have often held up before the class a jar full of credit cards and asked, "If there are 300 credit cards in this jar, and each card has a $4000 credit limit (buying power), how much money is this jar of cards worth?"

Someone eventually will shout out the "right" answer: "$1,200,000." I then say, "And that would be the correct answer IF credit cards were money. Since they are not, this jar actually represents $1,200,000 of debt, not money!"

Intellectually, we may acknowledge that credit cards are not money, but practically using them so often to buy things makes it feel like we are spending "money" when we use them.

This is, no doubt, why one college student recently told me, "I'm glad I have a couple of credit cards, because even when I am flat broke, I always have money in my pocket!" And another client listed her credit cards as a "source of income."

Again, the simple but vital fact to know is this: "When we use a credit card, we are not spending money, we are borrowing money."

Now, let me illustrate this to you: Two women go to the mall to shop for some needed items. Neither of them carries cash, and neither of them carry a checkbook. The first woman uses a credit card to purchase her three items, but the second lady, who does not own a credit card, does something quite different. She drives to her bank before each purchase and secures a loan to pay for her items. Thus, she makes three trips to the bank and secures three different loans in order to pay for her three purchases.

At first glance it may seem like these two ladies used two different financial transactions to pay for their purchases, but not so! Both of them borrowed money, one with her credit card, the other with a bank note. Both created debt that must be repaid.

And that is the point! Each time we use a credit card, we secure a loan through a bank, and that loan must be repaid. We have pre-approval to borrow up to a certain amount of money with terms of repaying it by a certain time. We do not physically make a trip to the bank, but other than that, the transactions are virtually the same.

That is what smart people know about credit cards, and that is why smart people do not look at their cards as the ability to spend money. They see them as the ability to borrow money and create debt!

So, now that you know what smart people know, what will you do with that information? Will you whisper to yourself the next time you are ready to use your card, "I am about to borrow money and create a debt that I must repay."

By understanding this one fact about credit cards, we will automatically be much more cautious about when, where, and how much we use them.

Ask Mr. G
© Jim Garnett, The Debt Doctor
AskMrG Consulting, LLC
2216 SW 35th Street
Ankeny, IA 50023

ICFE eNEWS is available FREE upon request by visiting the ICFE's Web site and filling out the contact form, selecting "Yes" for "Add to Mailing List." Please pass this eNEWS on to your peers and interested others and invite them to subscribe for free. Also, visit the ICFE's new Web site: StudentDebtHelp.org

Sent by:
Paul Richard
President - Executive Director
Institute of Consumer Financial Education (ICFE) - ICFE.info - 619.239.1401