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What is better to use, credit cards or cash? It's a commonly asked question. In today's video I want to explain a little bit about what goes into making a credit score, and how which one is ultimately better to use, cash or credit cards?
My parents discovered credit cards. Imagine coming from a country where the concept of credit cards, didn’t exist, you could only buy, what you had in physical cash. If you didn’t have it, you couldn’t buy it. Then coming to the US and realizing, there’s these little plastic cards that make you be able to buy anything through financing.
So if you’re in credit card debt, student loan debt, or any other kind of debt, let’s get some stats out of the way because I don’t want you to feel bad.
The total consumer debt in the United States stands at nearly $14 trillion dollars. 1.5 trillion is coming from student loans, which is a household average of $46,822. Car loans, 1.3 trillion dollars or a household average of $27,804. Home loans….. 9.44 TRILLION dollars or $189,586.
And credit cards….according to Experian which is one of the credit bureaus that make up your credit score (whenever people ask how to increase your credit score) they are 1 of 3. The average credit card debt is at $6,194. That’s actually not bad, that’s manageable, but it continues to climb at a rate of 3% per year. The average FICO credit score is 703 which is pretty good, and the driving force behind the increase are millennials. So if you fall anywhere in that debt range, just remember to breathe, it’s going to be alright.
Before filming this video, I found an article by discover credit card, that said “Cash or Credit: Why Credit Cards win” which I thought was hilarious , a credit card company claiming that credit cards are better than cash.
Dave Ramsey, a big finance guy in this space says burn all credit cards and get rid of them. Graham Stephan, another respected finance YouTuber says, use them. So which is it? To understand the answer to this question, let’s cover some pros and cons that you may not have thought about before because they each have their strengths and weaknesses.
Pros of Credit Cards:
-Here is the uncomfortable truth, no matter how much you may hate credit cards: here in the United States, it's tough to live without a credit card. You literally NEED a credit card to pay for things like hotels, and rental cars. Credit cards can be accepted everywhere but cash is not.
- If your cash gets stolen, you’re completely out of luck, there’s no getting it back. With credit cards, if you lose it, all you have to do is call and cancel, some credit cards allow you to freeze the credit through the app directly without even needing to call.
- Credit cards help build your credit history. This is something only installment loans, and credit cards can do. Unfortunately utility and phone bills generally do not build your credit like a lot of people think they do, but they can hurt your credit if you don’t pay them on time.
- Credit cards can also pay off your loans by consolidating your credit card debt into one interest free credit card, so if you have a ton of credit card debt, consider transferring it to a lower interest rate card so that it can buy you some time - usually limited time and IF you have a good credit score.
- The BEST perk that credit cards provide over cash is the consumer protection and rewards like cash back.
-The downside to credit cards is pretty obvious. the annual percentage rates on these “unsecure loans”, or APR as they call it, is a HUGE 16.97%. The stock market ON AVERAGE, returns about 10%. So if you’re not paying your cards off every month, you’re giving those companies MORE money than you would make if you had money invested in the stock market.
Pro of Cash:
- Cash is a great tool for exercising self control, and budgeting in the most effective way possible. If you spend too much on groceries and you run out, then you know you spend too much, so you need to budget better. Generally, cash is the better tool in emergency situations, having $50-$100 in cash on you at all times, is going to be very helpful in a pinch.
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