Playing Your Cards Right
Credit cards are back in the news, this time because the credit card companies must comply with new, "consumer friendly" laws. The new laws are beneficial, restricting many abusive practices and providing clearer and earlier warnings to credit card customers. However, the media coverage skips over the question, "Should you have any credit card debt at all?" No, you should not.
It's a whole lot smarter to just not have any credit card debt at all. The financial logic is clear: unless you earn a return on your money greater than the interest rate you are paying on the debt, you will lose money. By its very nature, the vast majority of credit card debt is used to buy things to consume, not things that earn money. Paying off a debt that is costing even as low as 9% in interest is like getting a guaranteed 9% return on your money; and you cannot find a guaranteed, no-risk investment paying even 2%, let alone 9%.
If you are retired and your main source of income is a retirement plan account such as an IRA, all the money you take from that account is taxed as ordinary income. In order to get the money to make credit card payments, you not only have to withdraw that amount of money, you have to take out enough to cover the taxes on that money as well. This puts additional strain on the retirement portfolio.
Credit cards can be life savers when there is a dire emergency like large, unexpected medical expenses, or an urgent trip to help a child, friend, or relative. If used properly, they can help you build a strong credit score to improve the odds of getting or refinancing a mortgage, or leasing an apartment.
Proper use means paying off the balance in full every month. It means carrying zero credit card debt and paying zero credit card interest.
The short story on credit cards is, "if you can't afford to pay cash, you can't afford to buy it."
Sincerely,
Glen Janken, CFP®, CLU |
