A World Where Cash is King and Credit is Queen
By Justin Bolmgren
A Little History
The first credit card, named "Charg-It," was introduced in 1946 by John Biggins, a banker in Brooklyn, according to MasterCard. When a customer used it for a purchase, the bill was forwarded to Biggins' bank. The bank reimbursed the merchant and obtained payment from the customer. Three years later, the famous dinner between Frank McNamara, head of the Hamilton Credit Corporation, and Alfred Bloomingdale, grandson of Bloomingdale’s founder, gave birth to The Diners’ Club card. These events served as the launch-pad for the modern day credit card business.
The convenience of “credit” created a boom and now it seems all of us carry at least one plastic in our wallet. Charging for products has become a way of life. Yet 36% of Americans under 30 have never owned a credit card. Matt Schulz, CreditCards.com's senior analyst, gives his rationale, "Millennials' financial views were forged during the Great Recession and in the apocalyptic job market that they and their friends have faced.”
Here’s What may Happen
Really, this is an encouraging statistic. Though credit cards have their purpose and can be very useful for routine or even at times large family purchases, the horror stories of getting buried in credit card debt are all so true. Many find themselves in this situation for one of at least two reasons. One, a lack of discipline on spending. Out of control spending can quickly pile up to an insurmountable hill if your line of credit is viewed as “free money… Wohoo!” The word “Credit” comes from the Latin word Credere which means believe or trust. The point is, when spending against your line of credit, YOU and your creditor should believe this will be paid off. The best way to believe this will be paid off is developing a budget and sticking to it.
Another reason many get behind on credit cards is due to large unexpected purchases. Medical, home and auto repairs, family assistance; the reasons can be enumerable. A credit card can bandage the wound, so to speak, of one these financial set-backs. Forced to put the charge on a credit card, interest on the high balance may leave many unable to get dug out. Having an emergency fund helps you avoid the long term credit card debt exposure by proving with cash to use when an emergency arises.
How to Steer Clear of the Danger
Emergency funds can come from a variety of places. For example, Health Savings Accounts or Flex Spending Accounts can mitigate unexpected medical bills. Saving to match deductible is a good start but if you are uninsured with regards Dental and/or Vision, it would be helpful to create cushion for that as well. Further, if your Employer Sponsored Retirement Plan (i.e. 401k or 403b) offer loans, tapping into this provision if needed is better than maintaining high credit card balances. And of course, setting up a contingency cash fund, is a prudent way to avoid drowning in credit card debt. Lastly, allocating a portion of your taxable investment account to low volatility and highly liquid investments can double as an emergency reserve. The goal should be these vehicles collectively should cover about 3 months worth of expenses.