Opinion

Credit cards: Love them and hate them

Posted April 27

This is a positive take on credit cards. You don’t see those very often. Everyone wants to dump on debt, and there are reasons to do so. On the other hand, credit card debt can assist almost anyone in reaching certain goals.

It is important to note the reasons why credit card debt is not always bad. At certain times, it may actually be possible to make a purchase, such as a more reliable car, or to improve one’s education through credit card debt. The cost of the debt has to be viewed in light of the benefits expected from these activities.

Credit cards are a very powerful factor in our economies. They can literally be life-savers. They can also lead people to suicidal thoughts and actions because of the high interest rates that are charged. Credit card debt for the average American household has gone over $8,000. This is the highest level since 2008.

Credit cards are required in order to establish or rebuild credit, without which the purchase of some items like cars and homes can prove very difficult. This is not to say that one can buy a home with a credit card. But one can rarely get a good mortgage without good credit, and you can rarely have good credit without obtaining a credit card.

Then again, delinquencies can have incredibly negative impacts. A late payment on a credit card, even if just a day beyond the 30-day grace period allowed by the major credit reporting agencies like Experian, Equifax and Transunion, can cause a huge drop in your FICO score. FICO scores were developed by a software company based in San Jose, California, founded by Bill Fair and Earl Isaac in 1956. The FICO name comes from shortening Fair Isaac Corporation.

The scores enable others to judge your credit worthiness. The resultant negative impact of one late payment on your FICO score can undo many years of good payment history and can jeopardize your existing or potential relationships with lenders immediately — as they may become hesitant to lend to you. The positive experiences with credit cards can be enhanced by making timely payments and by paying more than the minimum amount required. The key, though, is to pay off the balance without paying interest if at all possible. There are few investments you can make that will pay more than a 20 percent or 30 percent return. In my mind, there is no consumer good that justifies paying 20-30 percent interest.

Another thing, if you are unable to pay your credit card debts, it is best to contact the card issuers immediately. They may assist in restructuring payments, thereby making them more affordable and protecting the creditor. Debt management companies are also available and provide professionals who help borrowers keep track of their payments by making only a single payment monthly to the debt management firm. They also provide debt counseling in some cases.

Generally, the answers to these credit card questions are simple. Use a credit card when it saves you time and you would prefer to not use the cash. Otherwise, don’t use a credit card. It is better to go without in most cases. Paying from available cash enforces discipline and always results in better decisions.

If at all possible you will also want to establish a strong relationship with a bank or a credit union.

John Hoffmire is director of the Impact Bond Fund at Saïd Business School at Oxford University and directs the Center on Business and Poverty at the Wisconsin School of Business at UW-Madison. He runs Progress Through Business, a nonprofit group promoting economic development. Junior De O'Tobo, Hoffmire’s colleague at Progress Through Business, did the research for this article.

John Hoffmire teaches at SaÏd Business School at the University of Oxford.

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