The average American family has 8 credit cards.  Many Americans carry a debt load of more than they earn in a year.  In cases like this, with compounding interest and the inability to make barely more than a minimum payment, millions of Americans are only an illness, a layoff, a pregnancy, or an auto accident removed from bankruptcy.

 

Credit is most commonly defined as the act of giving recognition or approval. In the financial sense, it is the act of a lender approving the transfer of money between their accounts and the borrower’s.  That does not necessarily mean the actual transfer of funds, just the approval of the future transfer (the setting up of a credit line or credit limit).

 

Debt is the state of owing something, often money, to someone else. The debtor has an obligation to repay the lender the amount owed (principal amount), and usually an additional amount (interest) is given for the privilege of spending money that wasn't theirs.

 

Using a plastic card to take advantage of the credit means the conversion of credit into debt.  For example if you’ve been approved for $5000 in credit, if you use $1000 of it, you now only have $4000 in credit available, and $1000 of new debt.

 

Now that you’ve converted some of the credit into debt, the debt takes on a life of its own.  Now you have to start paying back the debt (the $1,000 you used), plus interest.  And that interest will cost you future interest (compounding at its finest), if you don’t pay it back all at once.  A typical American will pay as much as $10,000, or more, for every $5,000 that they borrow in this manner.

 

Using the plastic is a great way to lose a percentage of your income to a credit card company in exchange for nothing.  Yes, you might have received a nice dinner, you might have an IPOD, you might have a new pair of shoes, but by the time the debt is paid back, the IPOD will be obsolete, the shoes are out of style, and the dinner has been forgotten (maybe even worked off at the gym where you purchased a membership with your card!).

 

Not only do you have to pay interest to the company that you owe money to, you lose interest on the money that you could otherwise have put into a savings account, money market fund, or investment.  So you’re losing twice!

 

Therefore I suggest that you fix in your mind now and forever the message that the little plastic cards in your wallet are really not credit cards at all (except to the companies that issue them).

 

To you and to me, that piece of plastic is really . . .

 

A DEBT CARD

 

Because every time you use it, you’re creating a debt that has to be paid back sooner or later.

 

Yes, sometimes debt cards are a necessary thing to use.  For online or telephone purchases.  For emergencies.  For deposits on rental cars and hotel rooms.  But too