I actually remember when cash was king. A couple of years ago I was reminded that such a thing existed while visiting Japan. Japan remains credit card averse. Aside from the large hotels and those companies catering to foreigners, you better have cash to pay for what you want. It was a good reminder for me. The credit card is a new invention, one that we have benefited from but are now feeling the unintended consequences. The credit card that we know today was not invented until 1950.
Do you remember when you got your first credit card? I remember when my parents got their first, sometime in the late 1960s. It was a Diners Card. My dad got it because he traveled a lot with his job. I got my first credit card when I got my first job. The job required travel so I actually got the credit card with the help of my company. Over the years, because of the allure of convenience, safety, frequent flyer incentives, etc., etc., I slowly and willingly abandoned cash for credit cards. But I still had the residual knowledge that the credit card had to be paid back, that it was a deferred payment.
How do young people, who have no relevant experience with “cash is king,” feel about credit cards? My kids got their first credit card (in their name) their freshman year in college. I took them to the bank, set up their student checking account with the debit card and the credit card. The entire experience was like a rite of passage. Given how quickly I fell down the slippery slope of using credit cards, I was concerned my kids would see it as an entitlement, not a tool to manage your personal finances.
My view is that we need to teach kids about credit cards like we teach them about automobiles and learning how to drive. A car is a tool, a means of transport. If you abuse the rules, your driving license will be taken away. Kids pay attention to this and take it seriously. A credit card is a tool. Unfortunately, you can create a lot of damage for yourself before it’s yanked away.
What I tell my kids…
Know what you are getting yourself into. Credit card companies are in the business of making a profit for their shareholders. They are middle men. When you use your credit card, they charge the merchant 2-3% of your purchase and they charge you interest if you don’t pay in full each month.
You are really attractive to credit card companies. Credit card companies spend about $200 in marketing expenses to get you as a customer. Young people, aged 18-25, are considered very valuable to credit card companies. Why? Because if they can get you as a customer early, you’ll likely be a customer for many years (helping them reduce their marketing expenses).
Credit cards are here to stay. They are neither good nor bad. It’s how you use them. They are good if it helps keep your finances safe and convenient. They are bad if you get trapped into forgetting that cash is king. They can be your best friend when you need a few more weeks to get the money to pay your bills. They can be your albatross if overspending, late fees and high interest charges dominate your personal finances.
Last thought - our hunger nature (for food, things, fun, pleasure) is really strong. If you have never had to defer your desires, using credit cards is an easy trap. Research has demonstrated that people can curb their hungers easier when they pay with cash. Stop and ask yourself: Would I buy this with cash? You’d be surprised how much easier it is to resist the urge to buy.
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