Responsible Credit Card Usage

The following speech was prepared and presented by Richard Thripp of Toastmasters of Port Orange, FL on 2015-01-14, in fulfillment of Competent Communication Project #3: “Get to the Point” in the Toastmasters curriculum.

Initially, I prepared the following essay, which was subsequently adapted into index cue cards that I used to deliver the speech.

After hearing my speech, the audience will be able to articulate three benefits of credit cards and contrast these benefits with drawbacks that can result from poor spending habits, a lack of self-discipline, or other factors.

Good evening fellow Toastmasters and guests,

Regarding self-discipline and credit cards, a common response is to advocate using cash or debit cards to limit our spending. Psychologists tell us we are likely to spend less if we have to fork over cold, hard cash rather than swiping a piece of plastic. However, credit cards offer a great number of advantages. Many credit cards now charge no annual fee and offer at least 1% in cash rewards on all purchases. Customers paying with credit cards have the recourse of pursuing a partial or complete chargeback against the merchant if receiving bad service, which is an avenue not available to users of cash and some debit cards. If the statement balance is fully paid within 21 days after the monthly statement closes, credit cards offer an interest-free loan with no risk, besides risk associated with a lack of self-discipline. If we pay them on time, credit cards help us build a good credit history. If we utilize less than about 30% of our credit lines, they are also likely to improve our credit scores, which can result in lower interest rates and more generous credit lines, not just with credit cards, but also mortgages and auto loans.

Despite these benefits, credit cards are not for everyone. Considering the average annual interest rate on a credit card is about 15%, deferring a balance of $5000 for one month will cost you about $63, completely wiping out the 1% in cashback rewards you may have earned. Further, missed payments can result in the penalty interest rate taking effect, typically 30%, as well as a late payment fee of about $37. Given these dire penalties, credit cards should be used by choice rather than out of necessity, and a wise consumer should always have enough money saved to cover all their credit card purchases.

Rather than condemning credit cards, we should recognize that for some people, they are effective, beneficial, and can actually help us build wealth. The credit card industry has a term for consumers who always pay their balance in full: “deadbeats.” This is because they earn far less money off these consumers than consumers who succumb to making the minimum payment while being subjected to high, compounding interest rates. The credit card business is so lucrative that credit card issuers offer large incentives to new account holders, often in the neighborhood of $500, as well as promotional 0% interest rates from 6 months to as long as 24 months, designed to get you in the habit of not paying the balance in full each month. Being a deadbeat means you can take advantage of these financial incentives while never giving them the satisfaction of profiting through interest and late fees.

The savvy, deadbeat credit card user is likely fiscally responsible in most areas of life, and has developed prudent habits that make him or her far less susceptible to the pitfalls of credit cards. When evaluating whether you are cut out to be a deadbeat, I suggest taking the approach of a financial actuary—rather than relying on emotions and self-image, compile statistics on how much money you have lost to high interest rates, late fees, cash advances, and other financial mechanisms over the past year. If this amount is any more than a few dollars, I suggest you avoid credit cards like the plague.

INDEX CARDS (used for actual speech):

Regarding self-discipline and credit cards, a common response is to advocate using cash or debit cards to limit our spending. Psychologists tell us we are likely to spend less if we have to fork over cold, hard cash than swiping a piece of plastic. Since credit cards are not for everyone, this may be an appropriate response in many cases.

POINT 1: Credit cards not for everyone
• High interest and late fees
• Avg. 15% APR = $63 interest on $5000 balance in one month!
• Penalty 29.99% APR + $37 fee
• Minimum payment = trap
• 0.00% APR lures you in [transition]

POINT 2: Benefits of credit cards
• Interest-free loan (if paid in full)
• Sign-up bonuses and rewards, I made $5000 in 2 years, nontaxable income
• Builds credit history/score, tracking
• Chargebacks (more leverage than cash)
• “Deadbeat” users don’t pay interest/fees

POINT 3: Builds credit history
• Over time improves credit score
• Keep below 30% utilization
• Multiple CCs = less effect to avg. acct. age when new CC is opened
• High credit score = very valuable in life

While credit cards can be a trap for many people, they can allow you to make thousands of dollars in bonuses and rewards while building your credit. Lenders and scoring models look favorably at a long history of on-time payments, which will benefit you when seeking a mortgage, auto, or personal loan, or even when renting an apartment or car. Thus, using credit cards responsibly can pay large dividends.

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