Plastic is fantastic for many reasons, but credit cards unfortunately can also be a great way to waste money. The psychology of credit card spending is different from that of cash: plastic is a bit like play money, it separates us from the reality of shelling out our hard-earned cash, and postpones the pang of paying to a remote day in the future.
Few consumers are immune to the lure of credit cards. Wittingly or unwittingly, when using credit cards, we often let money slip through our hands in ways we never would if we were dealing with cash. Here are three common ways people waste money with credit cards:
1. Recurring monthly subscription charges. Would you throw a ten-dollar bill in the waste basket every month, five months in a row? Of course not. Yet, millions of American credit card users are doing so as we speak. We sign up for monthly subscriptions that we don’t use or need, be it an internet subscriptions service, a wine club, Netflix, or a monthly credit report service, and then let months go by before canceling.
Sometimes consumers don’t even know they have signed up for the recurring monthly charges. A current Senate investigation found that millions of American online shoppers have been duped out of as much as $1.4 billion dollars in credit card charges after signing up for bogus monthly subscription programs without realizing it.
And here is the clincher: According to the Senate investigation, although the charges appeared on the consumers’ credit card bills each month, almost one third let the unwanted charges slip by for more than six months before canceling; almost half (44.3 percent) took two to five months to get around to cancelling.
In the busyness of life, it’s easy to forget about those pesky little $10 to $20 monthly subscription charges you’ve been meaning to cancel. However, do the math: each adds up to $120 to $240 a year; that’s a pretty good hourly rate for the five minutes it takes to cancel them.
2. Credit Card Interest ‘Breaks’. Credit card interest rates have been escalating to some of their highest levels ever, leaving millions of cardholders with credit card debt frustrated and angry. Where there is a problem, there is a marketing opportunity, and this fact has not been lost on credit card companies. Several card issuers have come up with clever new ways to give cardholders a ‘break’ in their interest rates, as long as they play nice and pay their credit card bills on time.
Citicard’s Forward Card, for example, will chip off a quarter of a percentage point on the card interest rate if the cardholder pays on time three months in a row and doesn’t run charges up above the card’s credit limit. The Discover Motiva card promises to refund one month of interest charges if the cardholder pays on time for six months in a row.
It sounds great, but remember the old saying. If it looks like a duck, walks like a duck, and quacks like a duck, it’s a duck. Carrying high-interest credit card debt is just not a great use of your money. Chipping off a quarter or a full percentage point off an already high interest rate, may be designed to look like a break, but it’s a break for the card issuer, not for you. The savings are negligible, and worse, the dynamics of the cards are such that they encourage cardholders to keep credit card balances on the cards longer to benefit from the interest rate break.
3. Paying just the minimum due. One of the great features of the new credit card rules is that it makes it easier to pay down your credit card debt. Why? Because once the new rules step into effect at the end of February, card issuers have to apply any payment above the minimum due to the balance with the highest interest rate. In the past, credit card companies have done exactly the opposite; all payments were applied to the balance with the lowest interest rate first, leaving high-interest balances to run up high interest charges.
If you pay only the minimum payment, you don’t benefit from this new rule, because the entire payment will be credited to the balance with the lowest interest rate. Add this to the many other disadvantages of paying only the minimum payment, and you’ll see why paying the minimum may well be the most significant way in which credit cards make you waste money.