Your Future Can’t Afford Your Purchases on Credit

When I worked in retail, I witnessed no shortage of people buying luxuries on credit. Not using a credit card merely for rewards points or other exclusive perks, but because they didn’t have enough money of their own. They had to use the credit limit available or they couldn’t buy. Worse, some had to get extra cards, because they already spent the money available in their primary cards. This is only ~1/10th as bad as getting payday loans, or 3 times as bad as a line of credit. Even the best of the three is still bad.

You are sacrificing greater future affordability than you gain.

Most purchases lose their effect over time. Some rapidly, drugs*; others gradually, a new smartphone. Clever excuse artists may claim they only use their credit for bigger, more functional purchases, like a used car or a bike. This is deceptive compartmentalization. Using up all of your non-credit spending is what causes you to need credit for the other purchases. This includes unpredicted emergency spending. You better be a legitimate psychic if you can only afford the spending you expect.

Buying anything on credit means all of your spending is on credit.

Say you suddenly need to replace your vehicle, and buy a decent quality car for $10,000. You don’t have that much available, so you “need” a loan. You only need the loan because of all the luxuries you bought before you knew you would need another $10,000 for the next car. It’s not hard to keep a good car for at least 5 years, and plenty of people spend around $5/day for Starbucks or some other daily treat. Dropping that Starbucks habit could have bought the car in a comfortable ~5.5 years, without credit or taking advantage of compounding savings.

The spending that keeps on spending.

Now that you bought the car with a loan, you aren’t only spending $10,000 on the purchase. Assuming you don’t change your habits and pay the loan as scheduled, the extra cost of interest could easily hit $4000. That’s 800 days less of affordable Starbucks. Spread over a loan 5 years, 160 days of Starbucks are now lost to the loan, every year.

Ways to improve the situation:
  • Drop Starbucks and other treats completely to save before you need a large payment or make principal payments on the loan until it is paid off.
  • Find a better solution to transport than a car. Move within walking distance to work, get delivery for anything you can’t easily reach, use rentals on the weekend, etc.
  • Look at your other “necessities” and check to see if any portion is more than you should be spending. Too much apartment, too many clothes, overprocessed groceries, early upgrades to electronics, etc.
When borrowing is worth it:

If you are paying for productivity gains far beyond the cost of renting money, then it is reasonable to borrow. It is a financial cost for a greater financial gain. Buying a home can qualify, but several factors can disqualify the value of the investment. Education is often touted as a major financial benefit, but there are many degrees and institutions where the costs far outweigh the benefits.

*Examples include Pot, Alcohol, Sugar, and Caffeine.

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