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As you progress through your adult life, money management skills are vital. For instance, figuring out when and how to consolidate debt or managing your monthly budget is crucial. Knowing how to use credit cards responsibly is perhaps one of the most essential skills you should have, though.
Famous billionaire Warren Buffett has been disdainful of credit cards on multiple occasions. His comments are worth considering, so we’ll take a few moments to break them down.
Buffett is an American business magnate who has been in the public eye for many years. He is the CEO and chairman of Berkshire Hathaway, a famous conglomerate headquartered in Omaha, Nebraska.
Buffett is worth about $95 billion today. Most individuals and families don’t plan to accrue wealth to rival Buffett’s. However, whenever this highly successful businessman talks about his financial habits, you should consider taking his advice to heart.
Buffett doesn’t like credit cards, and he says he pays for about 98% of his purchases in cash instead. At a Berkshire Hathaway shareholder’s meeting in 2020, Buffett spoke about a friend who came into money and asked for advice. Buffett advised her to pay off her credit card debt before doing anything else.
If you take the time to analyze Buffett’s response, it makes sense. Think about this: if you invest in the stock market for an extended period, you should historically see a return on your investment of 9-10%. You might even see as much as a 12-15% return if it’s a bull market.
Meanwhile, if you’re carrying any credit card debt, you’re probably paying an average interest rate of 18% on it. The interest rate on some of your individual cards might be more or less than that, but 18% is the current average.
If you look at it that way, you’ll realize that you’re losing money through credit card interest payments as long as you continue carrying debt. Millions of Americans have at least some credit card debt, and the interest payments are part of what’s harming their ongoing financial strategies.
Warren Buffett has never said you should get rid of your credit cards, and it would be unrealistic to do so. After all, it’s genuinely difficult to pay for everything in cash.
You can’t use cash to pay for something you’re buying through an online website like Amazon. Most people don’t like to carry large amounts of money when they’re doing their weekly grocery shopping. You need credit cards to pay for things like airline tickets or when you’re booking hotels online.
Getting rid of your credit cards isn’t the solution to negating all of your credit card debt. Instead, if you ever see a significant windfall, it’s best to use that money to pay off all of your credit card debts before you even begin to think about investing. That’s what Warren Buffett was trying to tell his friend.
You’re probably not ever going to amass a fortune like Warren Buffett’s, but that doesn’t mean you can’t follow the advice he gave his friend. You can keep the credit cards you have, but exercise restraint with them. Try not to carry debt on your credit cards since the high interest rates you’ll pay can easily wipe out the money your investments are bringing in.
If you use credit cards only when you can afford to pay off the balance at the end of that billing cycle, you’ll be in good shape. You won’t have to pay any exorbitant interest rates on your debt, and you can also take advantage of the perks your card offers. That’s the best possible use of credit cards as financial tools if you want to be a responsible adult.
