Over the holidays, many consumers resort to using credit cards to pay for gift. Often these consumers do not have enough money to cover the credit card balances they accumulate, and end up incurring significant amounts of debt. The interest on this debt can add anywhere from 30-100% of the amount of the initial purchase. For instance, if interest is 14% on a $1,000 purchase, and the consumer pays minimum payments when they are due, the consumer will have spent an addition $350 by the time the purchase is paid off. If interest is $25, the consumer will have spent an addition $1,000, doubling the amount of the original purchase.
When holiday shopping, consumers must remember that the discounts offered by big box stores are not as cut and dry as they may seem. Consumers should ask themselves why stores are willing to offer deep discounts if consumers open a line of credit and use that credit to make a purchase that same day. Consumers should examine how retailers benefit from this model, and how opening this seemingly beneficial credit card hurts the consumer.
Big box stores are trying to hook their customers into payments.
These stores are interested in the credit and financing business as a way of making a passive income. Just as financial advisors counsel their clients to take an asset and create a passive flow of income, retailers try to do the same by getting their customers to spend more than they actually have and pay large amounts of interest for an extended period of time. When retailers have hooked their customers into these payments, their profit margins increase dramatically.
Additionally, many retailers offer a credit when a customer opens a card. The customer often uses that credit to make a larger purchase than they originally intended, leading them to incur more interest and owe more payments. Even if the introductory rate on a card is 0%, after a given amount of time consumers will be charged retroactively on any purchases that have not been paid off completely. 14 million people across the nation have yet to pay off the debt incurred from the 2014 holiday season, and will likely continue to incur more debt from interest.
To avoid incurring credit card debt, consumers should use their policy loans to cover holiday purchases. Consumers tend to buy more and spend more when using a credit card. On the other hand, paying with cash triggers the same neuron in the brain as physical pain. Using a policy loan to withdraw cash and using that cash to make purchases will help consumers curb their spending and make it through the holidays debt-free.
Policy loans offer the perfect amount of liquidity for consumers shopping for the holidays. When accessing their policy loans, consumers tend to be making a calculated choice instead of an emotional choice. With a policy loan, consumers set their repayment schedule. They become educated on how their finances affect their personal life, and learn to never make a purchase without having the means to pay it back.
Policy loans allow consumers to have their own personal banking system and reserve capital to use in times of need. It is as simple as putting money away, borrowing from the reserved money, and paying it back.
Policy loans allow consumers to approach holiday shopping with discipline and principle, leaving these consumers to focus their holidays on sharing with others instead of stressing over credit card debt.