Dangers of Credit Cards:
A Biblical Christian View
A.) Danger #1: Carrying a Balance at a High Interest Rate
If you have credit cards on which you pay exorbitant rates of interest because you do not pay them off in full every month, you would do well to take heed to God’s view of your predicament: “The rich ruleth over the poor, and the borrower is servant to the lender” (Proverbs 22:7). When Israel was under God’s judgment and curse, He warned them that the heathen “shall lend to thee, and thou shalt not lend to him: he shall be the head, and thou shalt be the tail . . . . [he] shall get up above thee very high; and thou shalt come down very low” (Deuteronomy 28:43-44). The members of the nation would end up in poverty and bondage under the burden of high-interest loans, bringing them down very low. The recommendations below about the wise employment of credit cards are not for you; your part is simply to pay off your debt as quickly as possible. Rather than continuing to use credit cards for the convenience and rewards offered, you would do better to cancel, cut up, and throw away the ones you have so that you never pay high interest rates on them again. There are a number of ways you can attempt to get a reduction on the rate of interest you pay on your credit cards, including getting a loan with a peer-to-peer lending company, but those options will not be pursued further in this study. Christ’s model prayer states: “And lead us not into temptation, but deliver us from evil” (Matthew 6:13). If you are tempted and fall into the snare of paying high interest rates on credit cards instead of paying them off in full every single month without exception, credit cards are not a good for you, but an evil from which you need deliverance. You may miss out on some of the perks and benefits mentioned below, but they are nothing in comparison to the mountains of money you will throw away paying sky-high interest rates, which is terrible stewardship of the financial resources God has given you. More than one in three Americans with credit cards fail to pay them off in full every month, meaning that a large percentage of those who possess credit cards would be better off if they had none. (You can evaluate your financial situation by obtaining a free copy of your credit report and a free credit score by clicking here.)
So what should you do if you have a problem with carrying a balance and paying high rates of interest on credit cards? The answer is simple: get rid of them-the sooner the better.
B.) Danger #2: Spending More Than You Would Have Otherwise
A number of studies in behavioral economics indicate that people who use credit cards spend more money than those who use cash. While part of the increased level of expenditure by credit card users when contrasted with cash purchasers is explicable from the fact that those with credit cards are on average more wealthy than those who are unable to get credit, the psychological dangers of overspending on credit cards are real. Because of the delay of around a month in the arrival of the bill, swiping a credit card does not seem as “real” an expenditure as handing over physical cash or even as having money deducted instantly from one’s bank account when making a debit card transaction. The “pain” side of a purchase occurs immediately with a debit card or especially with a cash purchase, while the pain is delayed when using a credit card. In terms of one’s ability to reduce expenses and gain a greater rate of saving, credit cards give a new twist to the old adage, “No pain, no gain.” The greater psychological ease of spending on a credit card leads to an increased risk of making unnecessary and impulsive purchases and a lower level of resistance to greater spending on necessary items. Furthermore, credit card perks such as cash back on every purchase can lead customers to focus on the “benefit” of spending money–racking up points or cash back–rather than the cost, which is far larger than the benefit of the credit card perk. Someone who spends 20% more money because he uses a credit card, and gets 2% cash back on his purchase, still has 18% less money than if he had paid in cash. Finally, one who pays in cash has a spending limit beyond which he simply cannot go–the amount of cash he has on hand. If one is, say, at a restaurant and he has $50 in cash for the meal, it simply is not possible to get that one or two “little” extras that would drive the final bill over $50. Even if one has determined that he will not spend over $50, with a credit card that barrier is easily broken. I would suggest viewing this video and these articles (#1, #2, #3) before considering whether or not to use credit cards. If you decide to use credit cards, you need to recognize and guard against the real psychological danger of overspending, which can very easily outweigh any rewards or other benefits of using credit cards, and which do indeed outweigh the benefits, often greatly so, for a high percentage of the population.
So what should you do if using credit cards leads you to spend more than you would have otherwise? The simple answer is to stop using them. This simple answer is the best one for many people, and if you have never even thought about it, you ought to seriously and prayerfully do so. A more complex answer is to only use credit cards on purchases where there is essentially no temptation to overspend, such as when filling up one’s car with gas. (If you go inside the gas station and buy overpriced convenience store items, then even here you might do well to get rid of the credit card!) In any case, it is wise to deliberately and consciously determine to increase the level of “pain” when purchasing an item with a credit card. Consciously guard against the temptation to overspend because of your use of the credit card. Do not think about rewards points or other perks you are “earning” by spending money. Seek to visualize the credit card expenditure in the same way as you would were you taking physical greenbacks out of your wallet. Since, if you are going to use credit cards at all, it should be a rock-solid rule with you that you pay them off in full every month–indeed, you would do well to have automatic payments set up so that doing otherwise is not even an option–the only real difference is the extremely minor one of about a month between the time you make the purchase and the time of the bill. Such a short span is inconsequential in terms of proper planning on saving and spending, so imagine the money coming out of your checking account instantly when you swipe the credit card. Have a budget and stick to it; do not let the use of a credit card bust your budget. Read this as an example of how to budget. Consider doing the following: 1.) Figure out what your net take-home pay is after tithing, giving, and taxes. Deduct from this amount your necessary monthly expenditures, the percentage you save for retirement, for long-term savings (car replacement, downpayment for a house or house repair, etc.), and for shorter-term expenditures, and then see what is left. Figure out your “disposable income hourly wage” in this manner and think about voluntary expenditures in terms of that percentage. For example, say that your gross hourly wage was $25 / hour. After tithing 20% of your gross income (after all, we aren’t under the law, but under grace–so we should give more than required under law, no?) and giving an additional 4% above that, and after the government took its percentage out in taxes so it can waste what you have earned, perhaps your net wage was $15 an hour. Then, after factoring in your necessary monthly expenditures, from utilities to home mortgage or rent to gas, and also factoring in the percentage of your income you save, you will find out at the end that you are left with $1.75 / hour of what could be viewed as genuinely disposable income. Perhaps you did not think very hard in the past about spending $50 on new and non-essential clothing or going to a restaurant; you just put the item on your credit card. Thinking, “I take home $15 / hour, so I am spending three-and-a-half hours of my life, or close to half a day at work, just to get this thing” will probably reduce your tendency to make unneeded purchases. Thinking, “I have $1.75 / hour of disposable income, so I have to work for three-and-a-half days to pay for this” is even better. If, every time you get out your credit card, you visualize not only physical dollar bills but hours and hours of your life, hours that you can never, ever get back, being spent at work to get a particular item, the danger of overspending will probably be mitigated. Furthermore, in our family, we impose a waiting period on ourselves before buying any item over a certain amount: 24 hours before making a purchase over one (quite low) level, and 48 hours before making a purchase at a higher level.
In summary, the two greatest dangers when using credit cards are carrying a balance at a high interest rate and overspending. These dangers are very real and should be taken very seriously. There are other negatives to credit card use–for example, while using a credit card usually does not visibly change the ticket price for items you purchase, merchants are charged fees of several percentage points for each swipe of a credit card, and as the cards drive up merchant expenses, they necessarily drive up consumer prices. If you buy an item that costs $3 with a credit card, you may very well have just swiped away all the merchant’s profit on that item–and loving your neighbor as yourself means you ought to treat businesses the way you would want customers to treat you if you were the business owner. To avoid the danger of carrying a balance at a high interest rate, you would do well to have automatic payments set up to pay your cards off in full every month, and you should be passionately determined not to make any purchases that you do not have the money for–in other words, treat the credit card just like a debit card. Purchasing items you will not be able to pay off in full when the bill comes for them must not even be an option. To avoid the danger of overspending, consciously recognize the risk and enact appropriate measures to increase the “pain” of swiping your credit card. If you are not confident that you will not fall pray to the dangers of using credit cards, do not use them. You will miss out on a few rewards and perks, but you are a lot less likely to go bankrupt.
C.) Benefits Available to those who Avoid Credit Cards
Before dealing with the benefits of credit cards, it is necessary to mention that these benefits are only significant for people who totally avoid the dangers mentioned above of carrying high-interest rate balances and overspending. If you do not avoid these dangers, credit card benefits are vastly outweighed by their negatives. I should also mention that good debit cards have many of the perks and benefits of credit cards, although, as a rule, they cannot offer quite the same additional benefits to customers. Since merchants pay lower fees on PIN based debit card transactions than they do on credit transactions, debit card issuers have less merchant money to cycle back to customers than credit card issuers. Nevertheless, debit card perks can be quite attractive. The rewards-checking type of account offered by Layton State Bank offers customers 2% cash back on debit card transactions where the debit card is run as a credit card (that is, a non-PIN based transaction where you sign for the charge, hit “credit” rather than “debit” on a monitor, etc.; the bank can afford to give you 2% back when you run the card as a credit card because the company takes more money from the merchant than when the card is run as a debit card. If you use your PIN, hit “debit” on a monitor, etc. you get nothing back for using this card.) The PayPal Business Debit MasterCard gives customers 1% cash back on non-PIN based purchases (note that this offer is only valid on the Paypal business debit card, not the personal one), while Discover Bank provides customers $0.10 back on every debit card purchase. A search on Google for “Kasasa Cash Back 2% debit card” will find other financial institutions that offer 2% cash back debit cards with a variety of conditions, qualifications, and limitations. Usually these institutions have caps on the amount of cash back one can obtain in a monthly cycle, a sort of limitation not found with cash-back credit cards.
If your debit card account information is compromised, the money does get removed from your bank account right away–a definite negative. However, if you notify your financial institution within 48 hours you are only liable for up to $50 of the loss, and if you notify your financial institution within two months you are liable for a maximum of $500. (If you do not recognize and report the fraud for over two months, you could be liable for the entire amount stolen.) Many debit cards promise to cover you for the full amount that is stolen. If debit cards force you to have the financial discipline to avoid overspending, then the potential negative of losing $50 if your card is stolen is vastly outweighed by the benefit of avoiding debt. Of course, you need to keep track of the balance in your checking account so that you avoid overdrawing your balance and incurring fees in that manner; many financial institutions offer a variety of helps to assist customers in avoiding having their account balances go negative.