There is no doubt that plastic money has made our lives easier. But with great convenience comes great responsibility; when used well, plastic money can be a great tool. When used poorly, it mostly means you’ll end up in debt.
Here are some things to keep in mind about plastic money before using it.
What is Plastic Money and How Does It Work?
Plastic money is any card that can be used as a substitute for cash. The most common type of plastic money is a credit card, but debit cards, gift cards, and store cards are also considered plastic money.
When you use a credit card, you borrow money from the bank that issued the card. You will then have to pay back the money you borrowed, plus interest and fees. Debit cards work differently. When you use a debit card, the money is taken directly from your bank account.
The Advantages of Using Plastic Money
If you are wondering why you should trade those bills for a piece of plastic, read on.
We've already mentioned that having a card makes shopping very convenient, so let's discuss that first. On a basic, physical level, the first convenience is not having to carry around paper - no cash or checks needed, and even large amounts of money will easily fit into your pocket.
However, the most prominent advantage of having a card is making online purchases. There is no way to send physical bills via the internet, so you can only use cash in brick-and-mortar stores. With cards, you can shop from the convenience of your home.
Lastly, you can use your card to make purchases anywhere. The card in your pocket is likely issued by either Visa or Mastercard, which are accepted worldwide. Having a card on you when traveling will remove the stress of finding an exchange or having to calculate the price before you shop.
2. Card Rewards and Bonuses
Rewards are a popular way for companies to entice customers to use their cards. By offering travel miles, points, cash back, or other benefits, companies encourage customers to spend more money.
- Travel rewards are a great way to save money on your next vacation. Many cards offer travel miles or points that can be redeemed for discounts on airfare, hotels, and rental cars.
- Cash back is another popular type of reward that allows you to get some of your money back on select purchases. Some of the best rewards credit cards offer up to 5% cash back on categories like gas and groceries.
- Points are a versatile reward you can redeem for merchandise, gift cards, or even cash. Some cards allow you to transfer your points to airline miles or hotel loyalty programs.
3. Increased Safety and Security
Credit cards are the clear winner over cash when it comes to safety. They are harder to lose, and also offer protection against fraud.
If your credit card gets stolen, you can report the theft and have the charges reversed. You can also dispute fraudulent charges and have them removed. Cash, on the other hand, offers no such protection. If you're the victim of theft or fraud that robs you of it, you have no way to get your money back.
4. Cards Can Help You Build Credit
Credit cards are often thought of as a tool for people who already have good credit. However, when used responsibly, credit cards can help you improve your credit score.
After all, payment history is one of the essential factors in determining your credit score. Using a credit card and making on-time repayments on your bills, you can show that you can manage your debts responsibly, making you a good candidate for a loan in the future.
The Cons of Using Plastic Money
As with most things, there are also some drawbacks to using plastic money.
1. Overspending Potential
One of the biggest dangers of credit cards is spending more money than you have. Since it allows you to borrow against your credit limit, you might be tempted to leave the debt payment to your “future self,” who might not be able to afford the repayment. With cash, your limit is the last bill in your wallet, and there’s no way to overstep.
2. Credit Card Debt
Speaking of purchases you cannot afford, the key to using credit cards responsibly is to pay your credit card bill in full each month. If you don’t do that, the interest will keep piling up, and you might end up trapped. What’s more, if you miss a payment or make one late, your credit card company will likely raise your interest rate or impose fees.
Before you know it, you could be in serious credit card debt, leading to further financial difficulties.
3. Hidden Fees
It’s essential to be aware of any hidden fees lurking in your contract.
One of the most common hidden fees is the annual fee. Many credit card companies charge a yearly fee just for using their card. This fee can range from a few to several hundred dollars, so reading the fine print before signing up for a new card is crucial.
Another typical hidden fee is the late payment fee. If you don't pay your bill on time, you'll be charged a late payment fee. This fee is usually around $30, but it can be higher if you have a high balance.
Finally, many cards also charge a cash advance fee when using your card to get cash from an ATM. While there are ways to take money from the ATM without paying fees, you’ll usually have to factor 3% of the cash advance into your budget before taking out cash.
By being aware of these hidden fees, you can avoid them and save yourself a lot of money in the long run.
Use Your Cards Wisely
If you decide to use credit cards, here are the four fool-proof things you can do to avoid getting into debt:
- Only charge what you can afford to pay off at the end of the month.
- Don't spend more just because you can theoretically afford it within your credit limit.
- Always pay your bill on time to avoid late fees.
- Keep track of your spending to know how much you're really putting on your card.
Credit Card Alternatives
If you're worried about getting into debt, there are a few alternatives to credit cards.
- Debit Cards: A debit card is linked with your checking account, and you can only use it to spend what you have in there. This card will bring you all the convenience of using plastic money, including online payments and increased security, without pushing you into debt.
- Prepaid Card: Another option is to get a prepaid card, which allows you to load it up with cash before making any purchases. It is a good solution if you want to avoid overspending, and paying upfront means you don’t have to worry about bills at the end of the month.
Finally, you could use good old-fashioned cash.
Tips for Reducing Your Credit Card Debt
If you already have credit card debt, don't despair. There are a few things you can do to get out of it.
Try to pay more than the minimum payment each month. This will help you pay off your balance faster. Second, if you have multiple credit cards, focus on paying off the one with the highest interest rate first. And finally, try to avoid using your credit cards until you've paid off your debt.
Building up Your Overall Financial Health
Think about maintaining long-term financial health. Responsible spending habits and passive income can give you a cozy financial cushion, but these things take a while to build.
Always scrambling to pay off debt and being afraid of your own credit card is no way to live, so we suggest changing your mindset entirely. Instead of letting it get out of hand, think about small habits you can adopt that will one day lead to great business ideas and complete financial freedom.
Plastic money has its pros and cons, but it can be a great tool for small business owners. Remember to keep an eye on your spending, pay your bills on time, and only charge what you can afford.