With credit abundantly available, getting what you want right away, regardless of whether you have the cash to pay for it, is common practice. There are many rationales for convincing yourself that this behavior is acceptable: you've had a rough week and you deserve a treat; you'll be able to pay off your credit card as soon as you get your next paycheck; you need a new mp3 player to help you lose weight; or perhaps you feel that you've waited long enough for that new car and you're not willing to wait anymore.
Combine the excuses from those of us who know better with a lack of knowledge from those of us who don't, and you've got a nation of debtors. Whether you need a gentle nudge to get back on the right track or some basic knowledge to keep yourself out of trouble in the first place, we'll give you nine ways to help you talk yourself out of drawing on credit. (To learn more about the pros and cons to credit, check out our Debt Management feature.)
1. Financing your purchases doesn't teach self control.
At best, an unwillingness to exercise self control when it comes to money can rob you of financial security. At worst, an impulsive attitude toward buying can have a negative impact on other areas of your life as well, such as having the self control to maintain a healthy weight or go to bed at a reasonable time every night. Yes, exercising self control can be both difficult and boring, but it actually has many not-so-boring rewards, from staying out of the hospital to being able to afford your own home.
2. Financing your purchases means you aren't sticking to your budget.
What, you don't have a budget? Well, don't despair; it's easier than you think. For many people, budgeting is a great tool for keeping spending under control. It's easy to not realize how much charging a cup of coffee here, and a new book there, can add up over the course of the month and get you in trouble. The solution is to plan your expenses and write everything down. Budgeting can be as simple as making a pen-and-paper list of how much money you earn in a given month, followed by a running total of all your expenses. If you know how much money you have left, then you will know how much you can spend. (To learn more about creating a budget, read our Budgeting 101 feature.)
3. Credit card interest rates are expensive.
The reason self-control is so important when it comes to your finances isn't a moral or spiritual thing: it's a practical thing. Credit card interest rates are high, which can make financing your purchases expensive. If you don't have the money to pay cash for something in the first place, you probably don't want to make it even more expensive by adding interest to the price. If you buy an item for $1,000 using your credit card (with its 18% interest charge) and you only make the minimum payment every month, over one year you will end up paying $175 in interest. And to top it off, you will still owe $946 on your purchase.
4. Credit card interest rates increase when you can't pay off your balance in full.
To add insult to injury, that great annual percentage rate (APR) you thought you had on your credit card might have merely been an introductory rate that was subject to increase after a certain period if the balance has not been paid in full. An 8.99% APR can skyrocket to a 29.99% APR in the blink of an eye. "But that will never happen to me," you might say."I'll pay my balance in full as soon as it's payday." You may have the best of intentions, but they can easily get derailed by an unplanned expense like a car repair or an unexpected event like losing your job. (To find out what you are signing up for, see How To Read Loan And Credit Card Agreements.)
5. A poor credit score can affect your insurance rates, being accepted for a job or the ability to finance meaningful purchases like a home.
If your credit card balances go unpaid, your credit score will start to diminish. The next time one of your insurance policies is up for renewal, you may get hit with an unexpected rate increase. Insurance companies that check your credit score when considering your premium seem to assume that if you can't pay your bills, you might be letting your car or home maintenance slide, or you might be an irresponsible person in general, all of which could make you a higher risk by increasing your odds of filing a claim.
Some employers also run credit checks on potential job applicants, and an employer who is concerned enough to check your credit score will probably be concerned enough to not hire you if it's poor. If purchasing or refinancing a home is in your future, your credit score is particularly important, as it will determine the interest rate on your mortgage, or whether you're even eligible for a mortgage at all. (To learn more about how a bad credit score could hurt your job, read Bad Credit Puts The Brakes On Broker Career.)
6. Poor financial habits can jeopardize your relationships.
Money is probably one of the main reasons couples and families fight. It can be an extremely touchy subject, especially when there's not enough of it. Budgeting for expenses should be done with your family and significant other in mind. (Keep reading on this subject in The No.1 Reason Why Couples Fight and You Can't Live On Love.)
7. Financing purchases can lead to higher spending.
Some people spend more money, either by purchasing more items or by purchasing more expensive items, when paying on credit than they would with cash. Purchasing a $1,000 laptop might be easy to accept if you just sign a piece of paper. On the other hand, if you pay with cash, you can physically feel the $100 bills leaving your hand. This will give you a better sense of not only how much that laptop truly costs, but also how much money you have left in your now-lighter wallet.
8. In a worst-case scenario, the habit of financing your purchases can lead to bankruptcy.
If you go on enough spending sprees without a plan for paying them off, or if your plan goes awry because you lose your job, or get hit with massive medical bills, you may find yourself hopelessly in debt. Declaring bankruptcy will scar your credit history for up to 10 years, and even when it finally goes away, you'll still have to slowly build up good credit again. An ounce of prevention is worth a pound of cure. (If you're facing bankruptcy, see What You Need To Know About Bankruptcy and A Lifeline For Those Drowning In Debt.)
9. Avoiding financing can bring peace of mind.
If you don't owe anyone money, you won't have to worry about late fees, interest, annual fees or over-the-limit fees. The best way to treat yourself to something nice is to save up for it and buy it when you can truly afford it. The peace of mind that will come with not financing your purchase will be like treating yourself twice.
The Bottom Line
Remember, not financing your purchases doesn't mean you can't pay with a credit card - you just have to pay your bill in full within a month. The convenience, protection and cash-back rewards offered by credit cards make them a handy tool if you use them wisely.
The truth is if you can't really afford it, you may be giving yourself a gift in the short term, but you'll be giving yourself an expensive headache in the long run.