“Dear FQ Mom,
Some of my friends have extension credit cards from their parents and it looks so cool to just sign off your purchases while shopping. Sometimes I wish I had one. Should I ask my parents to give me one?” – Gen Z Shopper
Dear Gen Z Shopper,
A credit card may be your friend or foe, depending on your circumstances.
Here are the things you may want to ponder upon:
- Why are you asking for credit card? I assume that you’re still in school with no steady source of income. Are you studying away from home?
- How are your spending habits? Are you frugal and responsible enough to carry that mighty plastic?
Here are some advantages for the consumers (the cardholders):
1. They don’t have to carry a lot of cash.
2. They enjoy a float as long as they pay their bill on time and in full. (Float is the amount of time between the date they charge a purchase and the date the payment is due. This is the interest-free window which is usually one month for credit cards, allowing them to still earn interest on their cash before they make the actual payment.)
3. Their credit card bill functions as a record of purchases.
4. They can avail of interest-free installment on some purchases.
5. They earn points from using the card, which can be used to redeem gifts items.
On the other hand, the merchants (the establishments that honor the credit card) also enjoy some advantages in this arrangement despite the fee they pay the credit card company. Among them are:
1. Losses due to theft or errors in handling cash in the store are minimized.
2. The use of credit card increases sales because the customers are not limited by the amount of cash on hand.
The psychology of credit card vs. cash
So you may wonder, why is the credit card always vilified in many financial literacy seminars and books? If you’ve watched the movie Confessions of a Shopaholic, there’s a scene when the main character had to put her credit cards in the freezer.
You also see a lot of Suze Orman and Oprah Winfrey shows dramatically cutting up those credit cards goodbye.
Why vilify? Because all the advantages to the credit cardholders enumerated above are canceled off when we consider the reality that humans are not always acting rationally and responsibly.
If we were always rational, we would spend the same amount on goods and services whether we buy in cash or card because we know that either way, we will ultimately pay for our purchases, right? However, we are predictably irrational. Here are important factors to consider:
1. The pain of paying is felt more when using actual money.
Maybe the heroes on the bills and coins make spending more obvious? Paying for a P3,000.00 pair of shoes means you have to let go of 30 pieces of Manuel Roxas, or 6 pieces of Ninoy & Cory Aquino, or 3 pieces of the trio Escoda, Lim & Abad Santos. As you go on with your shopping, you see your wallet lose its bulk as you purchase one item after another.
2. Compare that to using your credit card.
It’s one single charge slip whether it’s PHP 100.00 or PHP 100,000.00! Your physical wallet stays the same. Well, it even becomes bulkier as you stash your charge slips in.
3. Buying in cash limits your purchases up to the amount of money you physically have at the moment.
This amount is something you decided on before you got into the heat of shopping. Decisions are best made in our “cold” or rational state. There are a lot of experiments in Behavioral Economics that prove that we make irrational decisions when in the “hot” state of mind. If you’re big on shopping, chances are the window displays easily put you in that “hot” state.
4. Irresponsible use of credit costs a lot of money.
Shop with your credit card only if you can pay the entire amount at the end of the month. Credit cards charge an average interest rate of 36% per annum, which is expressed as 3% per month to make it look lower for the cardholder. So please, pay your credit card bill in full all the time. Don’t even bother looking at the minimum balance but just focus on the total outstanding balance.
5. Never ever pay your credit card bill late.
You miss one day and it will cost you a lot of money. On top of the interest rate is a penalty charge.
6. Avoid purchasing on installments, even those that are interest-free.
If you really need to purchase on installment, make sure that it’s really interest-free. Ask whether there is a cash discount. (Again, it’s a play on words). As a matter of practice, you are better off paying the entire amount in one go. Why? Because when you delay payment, your future monthly budget will be affected by this carry-over expenses.
If you make installment payment a habit, you will see that your future budget is already burdened by purchases made months ago and keeping within your set monthly budget becomes more difficult.
Training yourself to handle money is still better done with real cash. Only spend what you already have. It is so much easier to learn how to live within your budget this way.
Should you be living away from your home and would, from time to time, need to purchase unexpected items and waiting for money to arrive may pose limitations, then a debit card may be an option to consider.
If your parents agree to a credit card to cover emergency items, make sure that you are clear on the rules of your card use. What emergency expenses are covered? What kind of approval do you need from them before you can use your credit card? What is the limit on the amount?
Look deep into yourself and review your spending habits. Chances are, you still need stringent training on spending discipline before you can responsibly use that mighty plastic. You may want to check your FQ Score to gauge your readiness to have a credit card.
Remember, the credit card can be your friend or foe, depending on how ready you are for it!