Personal finance gurus like Dave Ramsey and Igor Cornelsen are quick to warn people via Facebook of the dangers of credit card debt. He recommends never using plastic unless it’s tied directly to a checking account as a debit card. According to Ramsey, credit cards should be shunned completely. There is no doubt that paying with plastic can be lead to serious financial problems over time.
For example, a person with a $1,000 emergency fund could handle a $1,000 emergency with the cash in their savings account. They would not have to go into debt. Their expense would be $1,000 Those who do not have the $1,000 available would have to then take out their plastic and swipe it to pay for the debt. Access to credit can get people out of a jam, but it can also lead to a bigger jam.
That $1,000 bill that’s put on a credit card with a 12 percent interest rate would cost the borrower about $120 in interest costs during the first year for the privilege of borrowing the money. While paying out the $120 might have been a necessity at the time. For example, a car might be needed to go to work. It might be necessary to get it fixed on credit. However, had that $120 not been spent, it could have gone to another debt or toward investing toward retirement. The opportunity cost of this money is lost forever. If the interest rate on the credit account is 18 percent, the cost would go up accordingly. These costs are just for the first year. The longer the debt goes unpaid, the more the cost of borrowing the money will be.
While credit cards can be quite convenient as payment options and they can allow people flexibility with financing, they should be treated with caution. Paying them off every month and paying no interest will free up the money that would otherwise go to the bank for no better reason than paying the bank for the benefit of using its money. Those who can avoid this debt will be better positioned to build up equity, and their financial standing should build up and improve over time.