Credit Cards: How come so many people don't understand the basics of credit!

[Amogh]

I find it quite appalling that even among so called elite university educated graduates, there is a rampant misunderstanding of how credit works. Why do people even spend via a card at all except for say online purchases(try to use a debit card wherever possible) and absolute emergencies. Given I have grown up in a family with a general mistrust of credit cards but really why use them instead of cash? Is there any point to it other than convenience?

[eco_env]

establish a credit history. get extra money in the form of points. I don't have a credit card, but if I had one I'd use it like a debit card- pay it off every month.

[starmaker]

Yeah, I think you are incorrect about which people don't understand how credit works. I use my credit card for most things because it builds a credit history and I get cash back from it. Plus it means that I don't have to carry much cash. I pay it off in full every month. I have an excellent credit score. At least in the US, you need a good credit history to make a lot of major purchases (a car, a house) and if you don't establish that history, you won't be able to get good terms for, say, a mortgage.

[long_time_lurker]

I'd like to echo the other posters. My credit score is what qualified me for zero interest when I got my car 2 summers ago. That's free money. Also when you count rewards points, you are getting at least a 1% discount on everything.

Now on the other hand if you are talking about people who charge away indiscriminantly on cards and then don't pay off their balances, well then I am with you 100%. This is really an abhorrent behavior, especially when the same sorts of irresponsible people expect the rest of us to bail them out when they declare bankruptcy. It's a shame there still aren't debtors prisons.

[Amogh]

@Everyone: I see. I didn't figure in the whole credit rating thing. Discounts for using cards? Don't have either of these things down here in India. No wonder we aren't really big on the whole credit card scene. That and a general mistrust for credit on the whole.

Hmmm, while i agree that cards are so much more convenient(use a debit card! but the credit rating argument..), keeping track of your expenditure when u use them as the main method of transacting is a pain in the ass. Cash is so much more visible and simple. I think the tradeoff as you guys said would be to pay it off in full every month. God alone knows why people buy anything on credit and not pay it off in full anyways. Can't afford it? Save. Is always cheaper in the long run.

However, I guess i'll have to warm up to credit cards, if only just for the rating, if I am admitted to grad school this year. Ugh.

[Amogh]

I started this topic cos i saw a couple of topics where people were going on about credit card debt payments so I was wondering why people use cards to buy things they can't afford in the first place.

[starmaker]

Ah, if that is what you are wondering...it is true that some people use credit cards to buy luxury items that they can't afford. However, some people who are in bad but temporary financial situations use their credit cards for basic items that they can't afford but actually need, like food, medicine, or winter clothing. Obviously, this makes it difficult to get out of the bad financial situation, because then they end up with high-interest loan payments, but we're talking about items that you don't have the option of going without.

In other cases, people do have the money, or at least they think they do, but they don't have all of it at once. Let's say you want to make a big purchase, like a new laptop for school, that costs $1000. You don't have $1000 to spare, but it would be really useful to have that laptop, and once you have it you won't need another one for a few years. You have a net income of, say, $1200/month (not implausible for a PhD student), and that's enough, with your expenses, that if you are otherwise thrifty, each month you can put $100 toward paying down your credit card debt. Even with the high interest rates that many credit cards have, you can pay down your debt at a manageable pace as long as you don't lose your income. I avoid doing this sort of thing with a credit card, because I like the security of not having debt, but I don't think doing so is irresponsible or anything. It's just paying in chunks.

Of course, things can go terribly wrong. Following on the example from the previous paragraph, let's say you buy the laptop, planning to pay $100/month, but then two months later you are hit by a car while riding your bike to school and you are seriously injured to the point where you have to take medical leave from grad school. Depending on the program, you might lose your stipend, so now you have no income, and you also have medical bills to pay. You can't find a part-time retail job because there are four applicants for every job opening (as you might have heard, the US currently has elevated unemployment). You still owe $800 plus interest on your laptop, and suddenly you can't make the payments anymore. You start using your credit card to pay for your food and pain medication, even though this puts you deeper and deeper in debt, because you can't do without those things while you look for a job. Now you are in serious financial trouble, even though you weren't being irresponsible to start with, because you got unlucky.

[Amogh]

@starmaker: Makes sense and yet the thought of the the latter bit being a possibility still has me very ambivalent about cards.

[ktel]

I personally think that putting a $1000 computer on credit is irresponsible. If you don't have the money, then save it up. Similar premise, but you are ensuring your ability to pay. As starmaker said, most people get into trouble because some sort of emergency happened, and they already have credit card debt that they thought they could pay, and then it accumulates.

I have a credit card with a very low limit and use it for online bills and for the purpose of building up a credit rating. Otherwise I mainly use my debit card. I find cash can slip through your fingers and you can forget what you spent it on, while debit creates an online record of your spending.

[Krypton]

If you're THIS wary about the dangers of credit card use, then you probably won't run into those very problems when you DO start using credit cards. Like me... I've always known about the kinds and severity of financial troubles people get themselves into with imprudent credit card use. Therefore, I never purchase anything (even on a card) for which I don't already have the money to pay for, always have my statements paid in full automatically, have never been in debt, and have just about the best credit score one could have without having a mortgage.

Also, forgetting about the other benefits of credit card usage like credit score and cashback, you seriously understate the benefit of convenience with a card. Quite frankly, it will be hard to get by using just cash and then dealing with change on every single purchase you make, as will it be carrying and writing out checks that cover larger expenses. A debit card gets around this, yes, but with your expenses on a credit card only needing to be paid off once a month, that means less monitoring of your checking account is necessary for making sure the amount within will cover scheduled payments.

[vertices]

In addition to building credit and convenience, credit cards are generally safer than debit cards in the US. There are laws in place protecting you against fraudulent charges and theft or loss that are stronger for credit cards than debit cards.

If you get into a dispute with a seller, you have more recourse to get your money back with a credit card than with cash or debit card. Let's say you purchase something and you get home and find out it doesn't work. If the seller won't talk to you, you can go through your credit company to reverse the charge until things are sorted out.

Also, I rather not carry around a lot of cash, not just for convenience, but in case of pickpockets.

Like several people on this thread, I only use my credit card when I know I have the money to pay it off when the bill comes and it hasn't been a problem. I don't have a debit card.

[HappyPessimist]

Google "hulu don't buy stuff you can't afford".... very funny SNL skit which pretty much sums it up!