Credit is not Cash
It is far too easy to think of credit in the way we think of cash. After all, we spend it the same way. For many of us, it has actually taken the place of cash, as we now use our credit cards not only for large purchases but even for the everyday smaller purchases. Some of us have stopped carrying cash, simply relying on our credit card to purchase whatever we may need, even if it is only a soda or candy bar at the local convenience store.
This may make our lives simpler from day to day, but there is a real danger in treating our credit card like cash, because it simply isn’t. If we act as if the credit line that it represents is actually a part of our income, we can find ourselves in real trouble. Credit is not like a paycheck. It is not something that we actually have in a tangible sense. It simply represents what the bank or credit card company believes we are capable of paying them – eventually. That’s where the problem comes in. If we don’t have the actual cash available to back up the purchases that we make, we will find ourselves in debt. And that is not a good thing, either for us or for our credit rating.
Too often we tend to view a credit card’s line of credit as an amount of money that we actually have to spend on whatever we choose. If we choose to simply add our credit limit to our total earnings when deciding how much we have available to spend for our expenses and purchases, we can end up with serious credit card debt. The simple fact is that whenever we pay for something with a credit card, we are in fact borrowing money from the credit card issuer to fund the purchase.
Part of the problem is that credit limits are often such large numbers that they make us feel like we have a huge amount of money actually available to us. If you start out with a good credit history, getting a high credit limit is not difficult. You may be rewarded for your solid credit history with a substantial line of credit for a new card, and the limits on your current card may be raised regularly. If you have a history of paying your bills on time and have proven to be a low credit risk, you will be “rewarded” with a higher line of credit. This reward often turns into temptation.
Suddenly, you have a way to finance that new flat screen television or vacation that you have been dreaming about. You can simply charge it! Unfortunately, when the bill comes in and you find that you don’t actually have the cash to pay it off, you are forced to pay only the minimum payment. That’s when the finance charges start adding up and that new purchase eventually turns into a pile of new debt.
Before you use that credit card to make a purchase, especially a large one, stop to think about how much money you actually have available to spend. As tempting as it may be, you shouldn’t charge anything that you will later struggle to pay back with your own actual money. The best way to think of your credit is like a cash advance that you must pay off each month. If you won’t have the actual cash to pay it back by the time the monthly payment is due, then you shouldn’t spend the money because the simple truth is that you don’t have it to begin with.
Our own money actually comes from our paychecks or other earnings. If we spend using our credit card, we are actually using someone else’s money. This is not the same as paying with a debit card which draws money directly from either our checking account or money pre-paid onto the card. In fact, for those of us who find that we have trouble avoiding the temptation of using our entire line of credit, one of those other payment cards might be a safer option. Then instead of mistakenly treating our credit as cash, we can actually pay with a piece of plastic that does represent the money we truly have.