Billionaire Mark Kuban wants you to throw away your credit cards.
The investor in “Shark Reservoir” has long been candid about his thoughts on using credit cards. In a 2008 blog post, How to Get Rich, he wrote: “Cut your credit cards. If you use a credit card, you don’t want to be rich. The first step to getting rich requires discipline.
Kuban told Business Insider in 2014 that he wanted to know when he was 20, “that credit cards are the worst investment you can make,”
While the Cuban Council assumes that cardholders have a balance that accrues interest, anyone can learn something or two from their credit card philosophy.
Below, CNBC Select takes a closer look at Cuba’s advice and what you need to know about the benefits of having (and using) a credit card.
Cuban credit card tips are classic
Most financial experts agree with the concerns of Cuban credit cards: Carrying a balance can really take you back.
In fact, former Wall Street titan Sally Kravcek, co-founder and CEO of the digital investment platform Ellevest, offers to pay off your credit card debt before building an emergency fund.
Credit cards impose notoriously high interest rates and every balance you carry costs you more than a month.
According to the latest data from the Federal Reserve, credit cards charge 16.43% interest. This percentage certainly exceeds any profit you earn from your savings and investments. The average national interest rate on savings accounts is only 0.05%, according to the FDIC. Historically, the average return on long-term investment is around 10% per year.
There is no doubt that carrying a balance on your credit card from month to month can lead to a rapid replenishment of your debt. When you don’t pay for your credit card purchases right away, you can accrue interest on what you already owe – making it harder and more expensive to pay everything off. Because credit card debt is high in the United States, this is a lesson that many Americans are learning the hard way.
Do you pay interest on your credit card debt? Consider transferring your debt to a balance transfer credit card that offers an introductory period of 0% interest so you can pick up your principal directly. The US bank Visa® Platinum Card offers 0% for the first 20 balance transfer invoices and purchases (after 13.99% to 23.99% APR variable).
There are pros to having and using a credit card
Although the Cuban recommends reducing your credit cards, there are several reasons why you may want to ignore this advice. Credit cards can help you build credit, and if you use them wisely, you can even win rewards, such as cash back, points or miles, on your expenses.
It is important to create a credit history at an early stage and credit cards can help you with this. A long, strong credit history can help you achieve a good credit rating. And good credit scores are the key to accessing better financial products, such as car loans, mortgages and even small business loans, if you want to follow Cuba’s entrepreneurial leader.
The good news is that if you follow some simple guidelines, you can successfully use a credit card and not stay in debt. You don’t have to use a lot of credit card to improve your credit rating, you just have to use it responsibly.
Here are two tips for using a credit card:
- Pay your credit card bills on time each time. Your payment history is the most important factor in calculating your credit rating.
- Don’t charge more than you can afford, and pay your credit card bills in full each month. Credit card issuers make it easy to get them by making only the minimum payment, which is often 1% to 3% of your balance each month. Although this seems convenient for your portfolio, it becomes expensive once issuers start adding a daily interest rate to that balance.
Although Cuba’s advice can protect you from debt, it can also prevent you from improving your credit rating, which can have a long-term negative impact on your overall finances. Your best course of action is to be careful about using your credit card and to spend as much as you can.
Find out more: The main reasons people get into credit card debt and how to avoid it from an Equifax expert
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Editorial note: The opinions, analyzes, reviews or recommendations expressed in this article are only those of CNBC Select and have not been reviewed, approved or otherwise approved by a third party.