221B Financial Solutions


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The Truth About Credit Cards

Various studies over the past five years have come out with the number of Americans who have credit cards. A safe assumption places about 70% of American households with at least one credit card. With most credit cards offering some type of a reward system (points, miles, cash back, etc.), many Americans not only see credit cards as a convenience but as a benefit. But are they really helping?

According to Nerdwallet.com “credit card balances carried from month to month have reached $420.22 billion in late 2018.” This balance is subject to an interest rate which on average is just below 16%. This means if you buy something for $100 and do not pay it off in the month you made the purchase, then you will owe $116 dollars for that same thing the following month. The reality is this: most people are not using a credit card for one, single $100 purchase, but rather for things such as student loans, car payments, and larger purchases. That 16% becomes problematic when it compounds month after month, robbing Americans not only of their income, but of any sort of freedom with their finances.

What if you are the type of person who uses a credit card for the points or miles, and pay off the balance each month? Aren’t you essentially getting free money or cash back? Well yes...and no. Credit card companies aren’t dumb, they are not giving out free money. These companies realize something you might not even realize about yourself. That 1%, 2%, or even 5% cash back on a credit card is still making them money. How? Because the borrower thinks they are getting a deal. It’s easier to justify using a credit card and paying for things if you think “I’ll get 2% back on this purchase” or “I get airline miles for this.” This mentality makes us more likely to buy something we don’t need, and charge it to a credit card because we are “getting rewarded” for it.

This is important to reiterate: if you don’t pay the full balance, you are now charged 16% interest, which is how the lender makes money even though they paid you 2% cash back or some airline miles.

Maybe you’re the most disciplined person in the world; you only buy what you need, you pay off your credit card every month, and you get cash back on your statement as a reward. If this is the case, then a credit card might not be such a terrible thing to keep in your wallet. But the majority of Americans with at least one credit card don’t maintain this mentality.

The issue with credit cards isn’t just the high interest rate you pay, or even the yearly fee you might have. The issue with credit cards is the way it lets consumerism sneak into our minds in a way we don’t even realize. At 221B Financial Solutions we strive to help people uncover what they really value so we can help them position their finances in such a way to live out those values. A credit card introduces temptation to put money into things you don’t value. Even drawing hard lines with when you use a credit card, what you use it for, and making sure to pay off the balance in full each month might not be enough to stop your mind from thinking value in life can come from things.

Here’s a real-life example: I have an Amazon credit card that gets me 5% on all purchases I make on Amazon’s website. That 5% can be redeemed for cash back or points toward items on their website. Originally I used the credit card to earn points I could spend on their website. The problem was, I found myself buying things I didn’t really need or value that much only because I had the points to do so. If I had $20.00 in points, and there was something I thought was cool for $25.00, I’d think “Wow, I’m only paying $5 for this thing.” The problem was, I found myself buying useless stuff I didn’t truly value.

How often before the end of the month do we actually look at the balance on our credit cards? I know I wasn’t checking very often. However, when I paid for things with cash, I very tangibly felt the exchange of money for whatever it was I was buying. Using cash to make purchases made me question whether what I was buying was a need or a want. Using cash made me a more disciplined spender. And using cash helped me understand freedom in finance is less about crunching numbers to earn some points and more about simple steps to ensure financial security.

David Evans