Why Credit Cards are a Financial Liability

by : Francis Mwendo

'Save for a rainy day' is the most common device we hear.

No one knows the future and a discerning 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 is 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.