Credit Card Bondage

Darren Pries-Klassen

Credit card usage is proving to be more temptation than people can resist. The practice of "buy now, pay later” has resulted in a current outstanding balance of $50 billion to VISA and Master Card in Canada alone. If everyone paid their card balance in full each month, the problem would diminish considerably, but many consumers carry a balance and are subjected to exorbitant interest rates.

Credit cards may have started as a convenient alternative to carrying cash, but have become a pacifier for consumers and a cash cow for retailers. Many large retailers have admitted that a majority of their profits no longer come from the sale of retail goods found on their shelves but from the interest collected on the charge cards they issue.
What makes credit card debt so bad is just that, it’s ‘bad’ debt. Bad debt has two characteristics. First, it’s expensive. Most credit cards charge interest rates of 18 percent or more. Some are nearly 30 percent! They may begin with no interest or with a single digit interest rate, but read the fine print of the contract. If you miss a payment or neglect to pay the balance in full the company reserves the right to increase the interest rate to nearly stratospheric levels.

Credit card debt is also bad debt when it has been used to purchase a ‘depreciating asset.’ Anything that begins to lose value the moment you purchase it such as clothing, furniture, electronics, and restaurant meals are examples of depreciating assets.

For example, you find the mountain bike of your dreams on sale for $999. You use your credit card to buy it. Before you can even put the card back in your wallet the bike begins to lose value. If you haven’t budgeted for it, and you can only pay the minimum monthly payment (2.5% of the balance owing or a minimum of $10 whichever is more), it will take you nearly 13 years to pay off the bike.

Over the 13 years you will pay more than $1,100 dollars in interest in addition to the purchase price. The final cost of the bike will be more than twice the sale price and you will still be paying the bill long after the bike has become worthless or sold at a garage sale. Still happy you bought that bike? Add a few more purchases on the card during those years, continue making the minimum payment, and it will take much longer than 13 years to pay for the bike.

How do you avoid paying the outrageous interest costs on your credit card? Use your card only for planned purchases, and be sure to pay your balance in full and on time each month. If you can’t afford the full payment, stop using the card. Period! Cancel the account, cut up the card and start using good old-fashioned cash for all purchases. At most, you need one credit card. Keep the one with the lowest annual fee and cancel the rest. Remember, a credit card is a tool, not free money.

Proverbs 22: 7 reminds us that the borrower is servant to the lender. If we use plastic foolishly, we become bound and trapped by our debt and the servants of the credit companies. Resist the trap. Be free to place your ‘interest’ in things you most value rather than worshipping the god of bad debt.

First published in 2006