There are lots of good reasons to have a credit card, including building credit and earning rewards. There are also some very bad reasons. And unfortunately, millions of millennials have a terrible reason for carrying plastic.
According to a recent study by The Ascent, as many as 35% of millennials indicate that they own a credit card in order to make purchases they cannot afford. That means nearly 2 in 5 millennials are making a terrible mistake in their belief that credit cards should be used in this way.
Owning a credit card to purchase unaffordable items is a major mistake for a very clear and obvious reason: The credit card does not actually make the purchase more affordable. In fact, it makes it less affordable.
While it is true that you can charge an item you can’t pay for all at once and can take that purchase home right away, doing this is a really bad idea. When you do this, you’ve committed a portion of every future paycheck to pay off your credit card bill until the balance has been paid down. Since you now have less money going forward, that makes every other purchase less affordable and makes it harder for you to live on a budget.
Charging purchases also makes each item cost more thanks to the interest you’ll owe. And credit cards are a very expensive way to borrow, as cards typically carry an interest rate well above other kinds of debt.
The average interest rate on a credit card in mid-August of 2019 was 17.71% APR. If you spend $1,000 at 17% APR and then make minimum payments equal to 2% of your card’s balance or $20, it would take you 137 months to become debt-free and you would pay $1,171 in interest – more than doubling your purchase cost.