Every day, we’re surrounded by “buy now, pay later” temptations. When we don’t have the actual cash to spend, it can be easy to convince ourselves that a credit card is essentially the same thing— money at the ready, just waiting to fill in the gaps in our budget, enticing us to buy.

Of course most of us know it’s not really our money. If it were our money it would be income or an asset, but it’s neither. In reality, this “money” is just another expense, and using our credit cards reduces the amount of money available to us in our budgets.

Paying later for something that’s not affordable today means we end up paying interest for the privilege of doing so. The shift from thinking of credit as income to credit as an expense is a simple one but not one we tend to readily make.

Imagine you’re walking along and you see your favourite item on sale in your favourite store for the rock bottom price of $1,200. You have never seen the price so low and, since it is in your favorite colour and this sale isn’t likely to last long, it goes without saying that you are seriously considering making this purchase.

Unfortunately you don’t have any room in this month’s budget for the purchase, but you have a credit card with an available limit of $2,000. Do you buy it? What are your considerations when making the decision?

Now imagine the same scenario — your favourite item on sale in your favorite store and you have never seen the price this low. You don’t have any room in this month’s budget for the purchase but you have $2,000 in your savings account. Do you buy it? What are your considerations when making the decision. 

Now consider that you saved this money by limiting your spending and putting away $500 a month over the last four months — do you buy it now? Is this an important consideration when making the decision? Does this change your decision about buying it?

Spending money on your credit card can feel very different than spending your savings: you have been given credit, but you had to work hard for your savings. You had to be conscious of your spending and make deliberate choices about where you were going to spend your money — and where you would not spend your money. It required a big commitment on your part to stick to your intention to save.

So why doesn’t the money your going to spend on your credit card feel the same? The payments you make to your credit card are made with the same hard earned money, are they not? But spending money on credit feels less concrete somehow, more indirect and less transparent.

For some reason we don’t relate using credit to spending cash. The separation between spending (on credit) and paying (for the credit) is minimal — at least until the next monthly credit card statement arrives — but it seems to be enough to make reality more abstract. Somehow through this process it’s become easy to ignore that credit is an expense that our income will eventually have to pay.

We all need to be more mindful and not  let making purchases with credit muddy the waters because the truth can be distilled down to one salient point: whatever you buy — by way of credit card or debit card — is purchased using your hard-earned income. You have the choice to buy it with your cash now or buy it with your cash later. And if you choose to pay later, you will be required to pay for the privilege of using someone else’s money for the purchase — by paying interest.

So when you are making decisions about whether to spend your money, don’t let debit or credit be the deciding factor. Either way it will be your cash on the line, so make sure any expenditure — regardless of payment method — is given your full consideration.

Rebecca Frederick
Frederick & Company (587)400-3344