Get a credit card for the wrong reasons, and this is what will happen to your kids.
We recently showcased the perspectives that rich people share and that the non-rich never think about. Again, we’re not saying that everyone who exhibits a certain set of characteristics will build wealth. We’re saying that everyone who doesn’t, won’t.
One difference that we’d mentioned between those with the capacity to build wealth and those with none is that the former focus on the upside, rather than the downside. If that sounds uselessly vague, let’s apply it to something real: credit cards.
Most of the ads you see for credit cards plug which features the hardest?
- Low-interest balance transfers
- Low-interest introductory rates.
To a rich person, those mean nothing. If you’re serious about building wealth, here’s what you care about when obtaining a credit card:
- Rewards
- Protection.
That’s it. Nothing else. (Well, maybe credit limit too, but how much they’ll let you charge is usually a function of your payment history with your particular issuer. There’s little you can do to increase your limits until you’ve been with said issuer for a while.)
This imbalance of priorities illustrates the difference between the rich and the dreamers as much as anything else does. Think about what you’re being sold with a ***6.99% APR*** (for 6-month introductory period) card. What exactly does that feature mean?
It’s a promise from the issuer that you won’t have to spend as much for your upcoming failure to pay your balance on time than you otherwise might have.
Same deal with the low balance transfer rate. We’ll say it until we wear out the relevant keys on the computer: examine each transaction from the other party’s perspective. Are they looking for something fair, or are they looking to profit off your hide?
What does a low balance transfer rate mean? Say you’ve got a Chase VISA card, and BB&T is throwing a low-balance-transfer MasterCard at you. The implicit message from BB&T is
“We’re so sure that you’ll be making interest payments to us for the next few years, if not the rest of your life, that we’re willing to put money on it. Here’s a few hundred now, in the form of us paying off part of the interest on your old card. We’ll gladly give you that money (or more precisely, give it to Chase on your behalf) because we know you’ll make it up to us. Over and over again.”
This is no different than a casino giving you a line of credit, and no less ethical. At Control Your Cash, we don’t fault the credit card companies for offering balance transfers. We fault you for accepting them. If Amy Winehouse hadn’t bought all the heroin, her dealer would have had to find some other profession.
So how does someone with a wealthy person’s mentality handle credit cards? First, by never carrying a balance, for reasons so obvious we’re not going to get into them here.
There’s more to it than that. Plenty of people never carry balances and aren’t necessarily rich. The wealthy person takes advantage of opportunities when they present themselves. Sure, that’s easier said than done. But while most opportunities take some effort to uncover, taking advantage of your credit card issuer is about as easy as it gets.
A wealthy person thinks, “I have expenses anyway, so I’d be nuts to pay cash for them when a credit card will let me
- wait 30 and even 60 days before paying
- build rewards that cash won’t.”
Time value of money. Spending $5 for something today is dumb when you can receive the same thing now and not have to spend the $5 until next month. That’s called not charging interest, and if every business did it we wouldn’t have an economy. There are perfectly legitimate reasons for paying interest, if you borrowed money that the lender explicitly demanded a return on (and that you’re putting to some economic use that will benefit you more than you’re benefiting the lender.) If you pay interest (e.g., on a credit card) just because you were financing household purchases or couldn’t mail your payment in on time, then you’re just an imbecile.
Discover got famous for offering 1% cash on every purchase. If you had to choose between a Discover card and a VISA that offered no cash back but gave you a “sweet” introductory rate, why on Earth would you choose the latter? Discover is giving you money. Furthermore, why would you pay cash if you could pay with Discover? Again, Discover is giving you money. (It needed repeating. And bolding.) The Federal Reserve doesn’t send you a $1 bill at the end of the month if you use a Ben Franklin to buy something with.
Non-cash rewards cards work splendidly too, as long as you don’t change your behavior to accommodate the card. (I don’t know if they make a Victoria’s Secret MasterCard, or a UFC VISA, but I’d have little incentive to use either one.)
Again, a rich person recognizes opportunity when it’s practically waving its junk in her face. I can benefit without having to do a blessed thing? Then yes, sign me up immediately.
Meanwhile, a loser’s quest is to minimize the damage (rather than trying to maximize the benefit.) The low-interest credit card is the rectangular plastic version of the low-tar cigarette. If you’re going to get financial cancer, why prolong its arrival?
**This article is featured in the Carnival of Personal Finance #326**
