Credit Cards Just Loans Wrapped In Pretty Plastic

Last weekend my daughter and I had a talk about credit cards after she saw me use my debit card at the store.  Here’s a sample of our exchange:

Her: “Dad, I thought you weren’t supposed to buy stuff with credit cards.”
Me: “That’s true, but that was a debit card I swiped in the store.  Debit cards take money right out of my checking account instead of borrowing money from the bank.”
Her: “Borrowing money? You mean credit cards are like a loan?”
Me: “Well, yes.  They are a loan – one that you have to pay back in a short time or you get charged interest.”

You can see what she was thinking.  Most people think of loans as something you apply for inside the bank, across the table from a neatly dressed banker. You fill out mountains of paperwork and sign your name a dozen places and then you shake hands with the banker across the desk.

Borrowing money on a credit card is much easier, and therein lies the danger. Once approved, you are free to spend right up to your credit limit (and often times beyond) without any additional scrutiny. No one asks if you can afford that item, or asks how you plan to repay the item. No one asks for collateral in case that item cannot be paid for long term. No, we simply swipe the card and go.

Maybe I could have avoided going into debt in the first place if I thought more like my daughter.  She’s right – credit cards are a loan. And in most cases, they would represent loans on very bad terms. Imagine sitting down at a bank to finance new bedroom furniture and agree to paying 24.99% interest!

So to those struggling with credit cards I offer up this bit of advice.  Shift your thinking about credit cards. Imagine every single time you use the card and sign the receipt it is the equivalent of signing a note for that amount. But banks don’t want you to see credit cards this way, which is why they go out of their way to improve the design and “convenience” of credit cards.  You didn’t honestly think they let you pick your own card design, or have it available in key-chain sizes to help you?

Banks recognize that the less their credit products look like a loan the better. So they wrap them in plastic, and cut them down to fit in your wallet (or on a keychain, see picture above), and maybe even pay the NFL to let them put the logo of your favorite team on the background.  Pretty snazzy, huh?  Well don’t be fooled.  Those things are miniature loans riding along in your back pocket, and they have the potential to wreak havoc on your financial life if not used properly.


  1. I am always shocked by how often people believe that the bank or credit card company will not loan them more money than they can pay back, or should borrow, or is good for them. The interest of the borrow and the lender might overlap – but they are not the same.

  2. I agree, never have had one and never will. Use a debit card on occasions when paying a bill over the phone and always get fed up of being asked by my Bank would I like to “up-grade” my account, my reply is something along the lines of.. and lead myself into a lifetime of debt no thanks! Funny they always seem surprised at my response and any pre learnt answers are forgotten and the end the call lol.
    Happy frugaling people.

  3. I strongly agree that the problem with credit cards is that they make taking out a loan too easy. We all are drawn to easy money.

    This is the problem with bull markets. We like the easy money aspect of bulls. We don’t so much like paying back the loan by enduring a stock crash and the economic crisis that comes with it.

    Financial freedom comes from adopting a new mindset about money matters. It’s honesty, really. It’s acknowledging that all money-for-nothing thinking does us harm in the end.


  4. Great way to think about credit cards. We’ve become much more responsible in our use of them, but I’d never really thought of them as a loan. Viewing them as such is a helpful way to curb unnecessary spending. Thanks for the suggestion.

  5. @Neal, I’ve read the same thing, and it makes perfect sense – if the money’s not tied to real cash, why does it matter what you spend, right? Therein lies the catch.

    This article presents a great perspective on credit cards I’ve never really considered – definitely makes it worthwhile to stop and think every time you use it.

  6. Very interesting point of view. I have always paid my credit cards off at the end of the month, but I can see where people would get caught up in spending money they don’t have.

  7. @Do You Dave Ramsey: Absolutely! “Frugal Daughter” is a very creative writer, and I fully expect her to one day have a blog many times more successful than her frugal dad’s. In fact, she will probably share a guest post or two here this summer.

  8. When I first saw the commercials with the people who only had to point their cards at the little reader machine, I was astounded. Now a burglar only needs to have the card in their hand for a second to purchase stuff. No ID required! They don’t even have to hand the card to anyone! FYI, this is why most of the time gas and such is purchased with stolen cards — because no one actually has to read the name and look at their face or ask for an ID.

    I went through the phase of using credit cards and justifying it by saying, “I’ll pay it all later!” Though now having paid it off years later, I’ve shifted my thinking to realize that you obviously do have to pay it all back at some point. Unlike some of the other phobic people here, I have not cut them up and closed all the accounts. And I don’t plan to. Credit cards are quite useful in certain circumstances, car rentals, airline reservations, online purchases using a temporary card number for security purposes (very nice) and more. Credit cards also make it much easier to overturn a reservation or purchase where the seller did not come through on their end of the deal (i.e.- flight cancellation, eBay, etc). I know that I have the willpower to limit my purchases whether I use cash or plastic. It is unfortunate that many would prefer to do away with it completely rather than just learn some self-control.

  9. Credit cards are worse than loans because 99% of the time, the APR changes at the banks discretion. At least with most loans, it is fixed.

  10. I was trying to figure out the little problem I had with the claim that if one has to sign for it, you think a little more before doing it. It’s car loans.

    Far too many people buy cars on instinct or just to hit a monthly payment that they would like to have and car little for the actual term length and APR of the loan. They tend to over-purchase their automobile and they are usually given quite a bit more time to think about it than your typical credit card purchase. Heck, there’s a guy where I work who was talking about trading in his truck on that swap-payment deal at the dealership (Used Car Buyback Program @ FrugalDad) and I tried to convince him otherwise. He barely grasped the fact that he would basically be “resetting” his payment clock on the truck he’s owned for almost 3 years now, though I don’t think I was able to sway his mind. He’s more than half-way done and he wasn’t hesitating too much on jumping back under another 5-6 year agreement. So though it may be easier with a credit card, I would say it usually occurs no less when you actually have to sign for the purchase. Heck, many people over-paid for their homes under ARM mortgages which is tantamount to how credit cards work. And they had PLENTY of time to think about it before jumping in.

  11. I have basically spent 17 years paying back a $700 store card I took out in Uni so that I could get some new clothes to take on my first overseas trip. Duh!! I know, but I was young and easily influenced and the card was easy to get. I hate to think of the fees I have paid over the years, mostly the rate was 19% and it was never fully paid off until 3 years ago.
    About 3 years ago I became wiser and started paying it off in total each month. No more $25.00 late fees and no more interest fees added to the minimal payment.
    Now I am snowballing my other credit card that has a higher limit. Now that I have teenage daughters I am aware that I don’t want them to make the same mistakes. So we tend to deal in cash and they are encouraged to save for their wants. The wants surface daily but there are discussions constantly about affordability and needs.

  12. Another way that credit cards are also similar to loans is that as the balance increases, the situation seems less and less ‘real’ and people want to just keep piling it on. (See our current national debt.) This also happens with student loans, mortgages, and home equity loans.

    My dad has about $25,000 in credit card debt. He makes the minimum payment each month and continues to use the card when he can’t make ends meet. The number is so staggering to him that he doesn’t even want to try to pay it down. He’s just waiting until he can cash out his 401(K) without penalty and pay it off in one lump sum.


  13. If used wisely, credit cards can be beneficial to the user. The flip side of that is that if you slip up, you are in a world of trouble. I finally paid off my final credit card a couple of weeks ago and will only use it when I have the cash in my bank account to pay off the transaction immediately.

    To some people it may not make sense to use a credit card when they have the money, why not just pay right away? I guess more than anything it is just the convenience. We’ll see how it works out. If I can’t do it that way then I know to just get rid of the card.

    PS- I’m not using it for day to day expenses, but rather once in a long while expenses, mostly to keep the account active and provide cash back rewards.

  14. Great perspective to take with credit cards.

    Another way to look at it is to estimate what the REAL cost of a purchase is, if you can’t pay it off in the next cycle. How much do you end up paying in fees when you buy using credit cards, have a high balance, and usually, high monthly finance fees.

    I believe it was Suze Orman who years ago would document how much more you spent buying stuff “ON SALE” with a credit card. Example: Vacation, $1,000. But total cost was closer to maybe $1,200 or more because you already had a balance and you incurred additional fees of $200.

    If you see something good on sale, but you can’t afford it, and you incur credit card fees, factor in those fees. You’ll see that it’s rarely “on sale” anymore.

    At least that’s how we look at things when considering a purchase. what will be the final REAL price, if we can’t pay it off in the next cycle. That does a lot to discourage sale buying.

    Don’t just look at the price you are being charged. But what it costs you, in the end.

  15. If someone is to shift their thinking to credit cards being a loan, then what were they thinking before? And how did that other thought survive the first payment? Maybe I’m being naive here but “credit” and “loan” are two words that are difficult for me to separate. If you don’t pay your cards off every month, then you should shop around for a low interest rate. If you use them for convenience and consumer protection, then shop for features. I think some loans can be good for people just starting out. You typically need that first car to get that first job, for example. Once you get on your feet, you should be careful about loans except for some really big ticket items like a home. That doesn’t mean you can’t have credit cards – they’re very handy for purchases over the internet and phone – just pay them off ever month – no exceptions.

  16. People are naturally going to spend more using a credit card because they don’t have to think about it, they know they can worry about it in the future.

  17. I’ve never understood how people lose their perception of money when using credit cards. I’ve had a credit card since I was a freshmen in college, and only once have I not paid the balance in full at the end of the month (the one time was this Black Friday, when I bought an HDTV after having already bought Christmas gifts. But I’ve yet to see the TV within $100 of the same price since then, so the $30 I paid in interest was fine by me.)

  18. Credit cards are not only a loan that costs you money – when you use one in a store, you cost the store money too (in the form of an interchange fee of about 2-2.75%). That’s why small retailers prefer that you use cash or debit cards. In the current climate retailers profit margins are waifer thin – they don’t need credit card companies skimming off them either.

    I wish everyone could would go back to cash or debit cards – individuals would be wealthier from not paying interest, and retailers would be better off from not paying the interchange fee. The credit card companies would suffer though…

  19. Yep. Credit cards are loans (unless you have a very careful budget and pay in full each month).

    But more importantly they’re TERRIBLE loans. Who would ever take out a loan at 10 %?!

  20. That’s a great way to think about credit cards! Personally, I’ve always thought of them as being the same as debit cards. I can’t spend money with a credit card unless I have it – in my bank account – to spend. It’s really dollars I’m spending, not some magical credit that is all airy-fairy.