Why Credit Cards are a Financial Liability
'Save for a rainy day' is the most common device we hear.
No one knows the future and a descerning person allocates a certain
amount of his income towards savings. There are many ways to do this.
Opening a separate savings account, investing in stocks, paying towards
insurance and immunities are some of the common methods that people use
to save their money.
There are however quite a lot of people who prefer to use credit cards
regularly and for almost all transactions, weather necessities or
luxuries. They do this in the mistaken belief that not paying for the
same in cash is a form of saving.
One of the most common psychological barriers that a consumer has when
it comes to his purchasing power is the use of money. It is human
tendency to consider a product to be costly when payment is made in
cash. It has to do with the physical handing over of the notes relative
to obtaining the product.
When we pay cash, we tend to evaluate the value of the product more
seriously. On the other hand, paying by the credit card also has a
psychological connotation. We tend to see only the affordability and
not so much the actual value of the product. The ease with which we can
afford almost anything by using a credit card drastically reduces our
ability to make a rationale evaluation. We also break down the total
cost into monthly instalments and rationalize the purchase. This has a
flip side however.
Credit cards provide the consumer with the flexibility to afford a
better lifestyle, which may be even beyond his income. The breaking
down of the payment into small monthly instalments also gives the
purchaser a false sense of a default in payment.
Many people use credit cards to purchase everyday groceries, pay for
medical bills, education fees, expensive holidays, utility bills and
more. The idea of 'cashless payment' is so appealing that credit cards
have become a way of life rather than a facility for emergencies.
While paying by card does not eliminate the truth that at some stage
the cash has to be handed over, it is the facility of deferred payment
that is the big draw. There are many important factors that a credit
card user has to understand before he even gets one.
The requirement of all credit card companies are payment of the minimum
balance. Usually, this is what most people think they should pay and
nothing more. This only carries forward the credit and consequently
adds to it the interest as well.
This means that the consumer may end paying a large amount of interest
over several years. There is also the possibility of the interest
becoming more than the actual cost of product. So in effect for the
so-called 'cashless payment' you are paying more cash than you should.
Further there is nothing to stop the credit card companies from hiking
the APR (annual percentage rate) at any point of the time especially if
you default on payment. Added to that, the late payment fees and other
hidden charged will only increase your liabilities.
If you need to invest, you need to take an option in which your monies
bring returns. It is a simple calculation. You must see growth in the
investment.