Want to Buy Something? Save, Don’t Borrow!

by Vered DeLeeuw · 23 comments

I’m always amazed when I look at my credit card statements and see the huge gap between the “New Balance” and the “Minimum Payment Due.”

On a recent statement: New balance $5,749. Minimum due $115. APR 13.24%. Penalty APR 27.24% (!)

With credit card interest inching higher every year, how can it possibly be a good idea to even allow that kind of debt in the first place?

And as if those rates that I saw on my statement are not high enough, I recently came across this article that says credit card rates are now even higher. In fact, at nearly 15%, they are at record highs. How can that be? We now have legislation in place to protect consumers from credit card fees, don’t we? Well, it turns out that the CARD Act cracks down on certain fees and requires more disclosures, but it does NOT cap interest rates.

Legislation to protect consumers sometimes backfires, and it looks as if this is one of the cases where it does, at least to some extent. Since the CARD Act does not allow credit card companies to retroactively raise interest rates, but does not cap interest rates on new customers, credit card companies are protecting themselves by essentially forcing new customers to accept extremely high rates.

The article goes on to examine the different rates offered based on different credit scores. The lower your credit score, the higher your APR – IF you can get a credit card, that is. But as I’m reading, all I can think is, “But this is insane. With 20% APR on even just a few hundred dollars, your debt will snowball so fast, it will quickly get completely out of control.”

So what’s a consumer to do?

The answer is obvious, although not necessarily easy to accomplish: Consumers must avoid credit card debt at all costs – yes, even at the cost of having less. (Do you really have “less” when you’re debt-free?)

But is it doable? Let me share a story with you. I met my husband back in 1990. I was 18. He was 26. Freshly out of college, he was driving this ridiculously old, beat-up Suzuki Swift. No air-conditioning, chipped paint, a tiny engine. The thing would hardly start each morning. I remember asking him if he was hoping to drive a better car someday. And his reply: “Sure, after I save enough to buy one.”

That’s when I realized that, bless his responsible soul, my then-boyfriend had never bought anything on credit. He always saved for a goal, sometimes for months or years. Only when he saved enough, did he allow himself to purchase a certain item.

His parents, now my in-laws, are the same. Over dinner recently, they proudly talked about how they never got into debt. With the exception of their house, they always insisted on living within their means. Even when they went on vacations with friends and those friends wanted to go to a fancy hotel, they simply said, “That’s fine. We’ll go to a more basic hotel, and we would love to meet you every morning at the beach.” No keeping up with the Joneses! No getting sucked into “I want X, I want it NOW, and if I don’t have enough to buy it, I’ll finance it with credit.” Beautiful in its simplicity, it’s a system that had saved them from serious financial trouble, and allowed them to comfortably retire at the age of sixty.

We live in different times, of course, and the pressure to buy, to consume, is more intense than ever. But the Great Recession has been an eye opener for many Americans, teaching us that the “live beyond our means and finance it with credit” is not the best choice. With frugality becoming more acceptable, even fashionable to some extent, and with these insanely high credit card rates, perhaps it’s time for American consumers to resolve to do whatever we can to live within our means, avoid the “must buy it now” trap, and work towards one of the most important financial goals one can achieve: living debt-free.

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{ read the comments below or add one }

  • Arminius Aurelius says:

    One of the few times I ever went into debt was when I decided to buy a bankrupt restaurant that obviously was bankrupt because of poor management . My first year I broke even but after that it slowly turned into a Gold mine . Another time was when I bought my first home and later when I bought rental properties after the Real Estate market crashed that I bought cheap . Ended up with 9 multi family houses and 5 restaurants …… all bought at bargain prices . Even though I am financially well off , to this day I still buy low mileage automobiles for about half price . ……. Debt impoverishes whereas money [ savings ] makes money .
    A Fool and his money are soon parted .

  • Revere Man says:

    And, those wishing to turn the nightmare around, whether they be rich, middle class or poor, will want to STOP (no matter how inconvenient) using credit cards.

  • ann oakley says:

    I heard you talk about where to buy eye glasses but I forgot the web site could you tell me again.

  • Ben says:

    Those morons have been preaching this for the last 70 years.

  • Randy Addison says:

    This article sure is an eye-opener in itself. This is really helpful. Great idea. Save money to buy what you need. Well, the most people who does that thing such as “buy it now” are those people who already fell into the trap of the credit cards.

  • Joe says:

    One really alarming trend is the lending to riskier borrowers. I’ve heard of people with bad credit getting credit cards with well over 50% interest rates. And while it is obviously stupid to do that, I’ve also heard of people who are facing impending joblessness taking care to keep their lines of credit open and letting their mortgages slide because if they lose their jobs, they can at least survive on credit for awhile.

  • Bargaineering says:

    I think it’s stunning that our society has gotten to the point where borrowing, rather than saving, was the norm. I’m glad to see it start to shift the other way. Borrowing just makes whatever you want to buy more expensive.

  • The Debt Free Baby says:

    We became debt free in July of 2010, and will never go back. Nice to see an article about living within your means, I completely agree.

  • krantcents says:

    Although I earned less than my friends, we had more discretionary income. We had no debt except for a mortgage and an occasional car payment. My kids went to private school and yet we always had more. I had outside income through real estate and eventually became financially independent at 38 years old. Debt or lack of it was part of it, but setting and accomplishing goals was most of it.

    • MoneyNing says:

      Good for you. It must feel great to know that you can just walk away from your job and still be able to live off your investments/assets.

      Working towards financial independence should be everybody’s goal.

  • Jenna says:

    Great post. I think it comes down to priorities. If it’s important for you to drive a nice car right now, you need to cut your losses with something else now to make it happen. If you want a nice vacation, you might not be able to do that AND have a nice car. Pick and choose.

  • Mike says:

    Don’t let those credit cards control your life. Get control of the cards and of your own destiny.

    We have three debt payments. Our camper (counts as a 2nd home for tax purposes), truck (0% interest) and car (0.9% interest).

    We use a credit card to buy almost everything. However, we pay it all off — every month. We actually earn several hundred dollars in rewards every year and that’s the way we redeem them — in gift cards worth cash.

    We have had credit card debt in the past, but we always paid it down. We didn’t always get the best of everything nor did we try to keep up with others.

    Our house is an old fix-it-up home — a work in progress for 30 years. It’s paid for.

    More importantly, over the years, we kept contributing as much as we could to savings for retirement. The month I turned 55, I retired. I’m now semi-retired, but I’m working on my own terms.

  • MB says:

    Great article. I’ve found that that the secret to credit cards for is to use them wisely. I only have credit union credit cards and pay off the balance in full each month so I never pay any interest. Some years ago, I read an article that suggested never charge more on your card than you have in your checking account and when you return home, immediately transfer the amount to your credit card. One of my cards allows me to do that while I have to wait until the charge posts to pay the others. Since all of my cards offer rewards and one of them is cash back, I feel I come out ahead by using credit cards.

    I attended a free budgeting for financial freedom seminar offered by one of my credit unions. The presenter recommended a cash-only, envelope system for budgeting because he said you tend to spend less when you are using cash. I tried his suggestion, but found that I spend about the same amount when I use only cash. I check my accounts daily and prefer to use my computer and online resources.

    Last week I found another advantage to using a credit card. I had some good quality headphones that broke, and even though I save my receipts, I could not find this particular receipt. Using my credit card, the store was able to print a duplicate receipt, and I am getting new headphones from the manufacturer.

  • KM says:

    I am all for saving instead of borrowing. I insist on it. Sadly though, you are punished for living within your means and not borrowing. When I tried to extend my Line of Credit at the bank the other day (I had a small amount that I was borrowing from to build my credit, then paying it back before it had a chance to accrue interest) so that I could pay for my last semester of college, they said that although my credit score is 800+, I needed a cosigner because I had so little credit history. Their reasoning was “if you have never made payments for a car, how can someone trust that you will make payments on a new car?” My answer along the lines of “because I am actually responsible and don’t have debt” was not really accepted.

    So there is no reward for that responsibility – you have to borrow small amounts because someone will trust you with the big ones. In a way, it makes sense, but it still doesn’t promote food financial behavior. And yet I still procrastinate on getting a credit card for the sole purpose of building credit since it just seems more of a hassle. I think I will just wait until I start working full time again and paying for the mortgage on our house after my mom adds me to it. That should fix my credit history without the messiness of credit cards.

    • vered says:

      “Sadly though, you are punished for living within your means and not borrowing. ” True. When we bought our last car, the dealership offered some great incentives for leasing, but not so great incentives if you paid cash.

    • MB says:

      I’ve used credit unions for years and have been satisfied with them. I agree that you can be penalized for living within your means. I know we have been. However, stick with frugal living and saving because it will pay off, and you should have a less stressful life. My husband retired at 56 about fifteen years ago when the company he worked for was sold. He did not plan to retire that early because we were more mature parents with two teen-agers. However, because we had generally (we, too, made mistakes over the years) saved and lived frugally on what we could afford, we were able to do it. I worked until our youngest was in college, and then we took off on a ten-year adventure in a small 24 foot paid-for RV (recreational vehicle). We are now living in a “sticks and bricks” again, but still traveling and looking forward to our next frugal adventure.

  • indio says:

    I agree with most of your premises. However, there are always going to be some exceptions. For example, when I bought my car the dealer was offering 0% financing. this meant I could own a new car and pay for it in installements rather than in a lump sum. While I had enough money to pay for the total cost up front, it made sense to accept the dealer’s loan and borrow almost the total cost of the car. This way my money was earning interest and this lowered by overall cost to buy the car. So if the purchase price was $30,000 and I put $5,000 down, I financed the remaining $25,000 with monthly payments over 5 years. With interest on that $25k over 5 years, the car actually ended up costing me $28,500.

    • KM says:

      How strange to see 0% financing for the long term. Usually they entice you with 0% for the first 6 months or so, then raise it up. But furniture stores and other such places also have similar options, which are smart to take advantage of, as long as you actually pay it off before the interest kicks in.

      • John Jolley says:

        You did mot mention the depreciation the moment you drove the car out of the showroom !
        Here in Europe that can be 60% over the first 3 years,a considerable sum of money I suggest.
        Personally I go in for Classic Cars,the hold their value at least.

  • Determined says:

    LOVE this post. This is what I am trying to do now. I wish I clued into the importance of living within my means years ago.

  • kaf says:

    Great post. My now husband and I made a pact before we got engaged: for each of us to enter our marriage with no debt. (Granted, we were very fortunate to have had very little student loans.) But nevertheless, we both buckled down and paid off everything from our cars to student loans to his J Crew credit card. It was a huge accomplishment that we’re still proud of. When we bought our first home, that became our first and only debt as a couple.
    If we have kids, we’ll be teaching this lesson to them too.

    • MoneyNing says:

      What a great agreement. Your whole family will be reaping the reward of this for the rest of your life.

    • Pumpkinshell says:

      This is a fantastic idea. I will impress on my 3 daughters that this is the best wedding gift they could give or get and to insist on it.

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