What are the Disadvantages of Using Plastic Money? A Comprehensive Overview

Summary

Plastic money – also known as credit cards, debit cards and prepaid cards - is often seen as a convenience and the safe alternative to carrying large sums of cash. While it is certainly a more secure option than cash, plastic money comes with its own set of disadvantages that users should be aware of.


One of the biggest disadvantages of plastic money is the potential for high interest rates. Credit cards in particular often have high interest rates and fees associated with them which can cause debt to quickly become unmanageable. Additionally, these high interest rates make it difficult to pay off debt because only a fraction of the balance is applied to the principal each month.

Another disadvantage of plastic money is the fact that it is not as universally accepted as cash. Not all businesses and restaurants accept credit cards, leaving the user stuck with the inability to make a purchase with their plastic money. Furthermore, even when accepted, there is often a minimum purchase requirement that must be made before the card can be used.

The third disadvantage of plastic money is the potential for identity theft. While more secure than cash in many ways, when a card is lost or stolen, the person's personal information and funds can be at risk of being misused by perpetrators. To protect against fraud and unauthorized purchases, plastic money users should monitor their account activity closely and promptly report any suspicious activity.

Another risk of using plastic money is increased impulse spending. Because the user isn't physically handing over cash, it can be difficult to keep track of what has been spent and how quickly debt is accruing. Furthermore, it can be very easy to become dependent on the plastic money and find yourself in severe debts.

Overall, while plastic money is often seen as a safe and convenient option to cash, it comes with its own set of disadvantages and potential risks. To help minimize those risks, plastic money users should be aware of the potential for high interest rates, the select acceptance, the potential for identity theft, and the increased impulse spending. Additionally, users should be sure to monitor their account activity and report any suspicious activity promptly.
 

Introduction to Plastic Money

Plastic money, also known as electronic or virtual money, is a form of payment that is not made in cash or with check, but rather through debit/credit cards. Plastic money gives you access to your own funds using a debit or credit card, which can be used anywhere from shopping to paying bills. This form of payment has grown in popularity over the last few years and is now accepted in most places.
 

Advantages of Plastic Money

Some of the main advantages of plastic money include convenience, security, and reward systems. With plastic money, you don't have to carry around cash or checks, so it is much more convenient to use. It also provides an extra layer of security when making payments, as there is no need to leave your bank account details with the merchant. Lastly, there are many reward programs associated with plastic money, which can help you save money in the long run.
 

Disadvantages of Plastic Money

While plastic money does provide many benefits and convenience, there are also some drawbacks to using it. One of the major drawbacks is that it can lead to overspending, as it is easier to swipe and go than to count cash. Additionally, using plastic money can also be more expensive than using cash as it usually entails transaction fees and other associated costs. Furthermore, plastic money can also be subject to fraud or theft, as it is much harder to detect and prevent these types of activities.
 

The Need for Financial Literacy

To make sure you get the most out of your plastic money, it is important to understand the financial implications of using it. Financial literacy is a must in order to make the most of your plastic money and use it responsibly. This includes learning about interest rates, fees, and other aspects of using plastic money, as these can all add up over time.
 

Conclusion

Overall, plastic money is an increasingly popular form of payment that offers many advantages and convenience for users. However, it also comes with some drawbacks, including the potential for overspending and the risk of fraud or theft. To make sure you get the most out of your plastic money, it is important to have financial literacy and use it responsibly.

But then something remarkable happened. My wife showed me a file of credit cards that have long been cancelled, but weren't cut up and thrown away — 20 of them, to be exact. That's right. I really said 20. Our 4-year-old son, thinking this was way cool for some reason, asked if he could "play" with them. And then it hit me. I suddenly remembered how we got into debt in the first place.

How it happened to us
In June, I wrote our story of being more than $45,000 in debt. The response and support from Fooldom was incredible. Many of you poured out your hearts and confessed your own financial sins. It was one of my favorite moments since first strolling into the virtual doors of Fool.com in 1998. But, now that I think about it, we may not deserve your kindness. Well, OK, my wife does. But not me.

Go back to what my son said. My wife's debt from before we were married came from financial hardship. She paid for her own education, for example. She had also dug herself out of debt once before I came along. Me? I bought a truck. And took out — gulp — cash advances on my cards during trips to Vegas. And took out loans on computers that would be obsolete well before I had made even a dent in the original balance. Like my 4-year-old, I had played around with plastic. In '98 alone, that silly behavior cost us more than $8,000... in interest payments alone.

So you've got to think I tore up all those cards, right? I mean, really, how could I responsibly expose my young'un to credit when I had been a Homo moronicus when it came to the little plastic beasts? Those are indeed reasonable assumptions. But, no, I didn't tear them up. Instead, I let him play with them as he had asked. But not before crossing out signatures and marking other unused ones "INVALID" on the signature line.

Why? Well, first, because he's only 4. I've got at least two years before the shopping sprees begin. And, second, because I thought the revelation — painful though it was — might provide a chance to teach my kid something. In a five-minute conversation, I confessed that the cards he was holding had made a mess of our lives because I had been irresponsible. Then I promised I wouldn't let it happen again. Maybe he got it. Maybe he didn't. But I felt better.

Will you be using your Nordstrom card today? Uh, no, thank you
The worst part of the ordeal was seeing all the retail credit cards we had, from stores such as Nordstrom (NYSE: JWN) and Sears (NYSE: S). Add to those my cards from Mervyn's, a former division of Target (NYSE: TGT), several May (NYSE: MAY) department stores, and ConocoPhillips ' (NYSE: COP) Union 76 unit. Why are these so bad? Because they tempt you with initial discounts and then charge huge interest rates on the back end.

Let's take Nordstrom's card as an example. If you look up the terms and conditions on the company's website, you'll notice that there are five levels of credit you can be offered, presumably based on your credit history. The best deal is pretty darn good for a credit card: 9.15% on purchases. But if you've got some blemishes, you could see a rate as high as 21%. The rate flips automatically to 24% if you're late with a payment. Ouch.

Now, if you'll pardon the shameless plug, compare that with The Motley Fool credit card offered through MBNA (NYSE: KRB), which features interest rates as low as 6.9% and rewards for those who like that sort of thing. But you need to get the Fool card to get this sort of deal. Lots of other banks offer something similar. (But you'll forgive us if we don't mention them here, won't you?)

The lesson here is simple, Fools: Retail cards are a notoriously bad deal, especially if you plan to carry any sort of a balance.

Get yer free credit reports here!
If you find yourself in the situation we did in '98, then one of the first things you should do is get your credit report. It's easy to do, and often free. To find out more, check out this story from fellow Fool and Trump watcher Dayana Yochim, who also happens to be principal of our Fool's School. There you can learn about credit, debt, investing, and brokers, and even get advice on buying a house.

Appropriately, my wife was digging through letters to credit providers and through old reports when we found all those cards. The file alone is massive. But the correspondence and cross-checking really helped us put together the plan that made us debt-free in three years. So, again, if you're in debt, get your credit reports now. And get them free. If you're not in debt but haven't checked your credit recently, you might consider the three-bureau report that TrueCredit offers at a discount for Fools like you.

Say it loud and proud
Being in debt can be a shameful experience, but it doesn't have to be. There are hundreds of others like you. So, do yourself a favor. The next time someone frowns on you when they learn of your debt, tell them you know a Homo moronicus who became a Fool and is tens of thousands of dollars richer as a result. And then proclaim that you're planning the same. You can do it.

Now, if you'll excuse me, I think I need to go buy my wife some flowers.

Foolish best wishes,
Tim

Fool contributor Tim Beyers believes inspiration can be found daily at the Fool's Credit Cards discussion board. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. To see what stocks are in his portfolio, check out his Fool profile, which is here. The Motley Fool is investors writing for investors and has a disclosure policy.

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