Credit Cards are like Prescription Drugs

In the right hands prescription drugs can do wonders – cure illness, relieve pain, and stop the spread of disease. In the wrong hands, even unqualified hands, it can cause dependence, sickness, and even death. In the same way, credit cards can be an excellent method of securely paying for purchases, keeping track of expenses, building a good credit score and even earning some cash back on everyday expenses. However, careless spending and missed payments can negate those benefits and even lead to financial death – bankruptcy.

Credit cards first came into popular use after World War II and have steadily grown since then. Now, almost everyone carries at least one credit card in their wallet. It offers convenience and security. Yes, cash is still king. I have yet to encounter a store that turns away Lincoln, Jackson, and Franklin, but gas stations that charge two different prices for cash and credit are almost as common as the California condor and I’ve seen as many brick and mortar stores that do the same as I’ve seen dodo birds. More and more people are realizing that when – not if – their wallet is misplaced or stolen, losing a piece of plastic is much easier to rebound from than having Grant get kidnapped. And with the internet becoming the world’s largest shopping mall, credit not just the preferred method but the only method.

How do these credit cards make their money? A portion comes from what amounts to a commission on the sales paid for by credit cards that merchants pay – typically about two percent. The bigger portion comes from consumers who carry over balances or run up fees such as for going over their credit limit. Credit card debt isn’t covered by collateral, like a mortgage, so credit card companies charge very high interest rates – sometimes over 20%. If an investment returned 20% per year, you would double your money in less than four years. Like a prescription drug, once you’re hooked, it’s hard to break the addiction.

So how are credit cards not closer to heroin than penicillin? First, used properly, they’re a great way to build credit. I’ve had a credit card since I was sixteen – yes, my mom cosigned my first one and I rarely used it back then – but I haven’t missed payments or had an other negative effects so now creditors can see that I’ve been able to handle credit for years making my credit score better. No, you don’t get a check just for having a good credit score, but it will mean lower rates on loans and opportunities for more favorable credit cards.

No, not all credit cards are created equal. While I’m sure platinum cards with high annual fees have their uses, I refuse to carry a card that I have to pay for. There are some that can over decent merchandise or travel rewards, but I’ve found the best return is cold hard cash. There are a number of credit cards that offer one percent back on all purchases. With a little searching, you can find cards that offer double, triple, or even centuple that. If you want to get fancy, you can find different cards that give specific benefits for different spending categories. I’ve got one card that I use solely for gas because it gives me five percent back. Another card gives me three percent back on the top three categories I spend in for the month – and then if I wait until I have two hundred dollars in rewards it pays back two hundred fifty, a twenty-five percent increase. Now that’s an investment I like.

It takes management and discipline not to overspend, but a little saving here and there can really add up.