I used to be a huge Dave Ramsey fan. We were trying to pay off our consumer debt and his messaged hooked me.
Dave says to pay off your credit cards and cancel them… so, that’s exactly what we did.
I wept as I canceled and destroyed my Cabela’s card. That account was about 8 years old and responsible for thousands of dollars’ worth of idiotic purchases. Good bye… sweet, sweet Cabela’s card…
It made sense for us to destroy the cards back then. We were $109,000 in debt, our financial habits were poor, and we were actively trying to get ourselves out of this hole.
Now that our financial habits are stronger and we’re debt-free, I wonder if we’re leaving money and opportunities on the table by not using any credit cards.
The personal finance community appears to be rather split on this. On one side you have your Dave Ramsey purists. Credit cards are the devil, if you own one your financial life is sure to end in ruins.
On the other side of the fence, you have your travel hackers and other folks in the FI community that like to suck up that “free” money from credit card rewards programs.
Who’s right? Beats me, but we can work through this together.
Credit Card Cons
Credit card debt has recently moved past mortgages as the most common type of debt held by Americans, and it doesn’t appear to be going away any time soon.
Let’s look at some terrifying statistics:
- Since 2013, credit card debt has increased by 18.5%
- The average American owes about $6,300 in credit card debt
- In 2017 credit card debt rose 7% from 2016 to an astonishing amount of 834 billion
- 54% of adults aged 18 to 25 spend more than they make each month
- 43% of American’s are unable to pay off their credit card balance (link)
I’m going to shock everyone here… American’s have a tendency to live above their means (GASP). I know, I know… you don’t believe me, but it’s true.
Adding insult to injury, the poor souls that carry a balance over month to month are paying an average of $855 a year in interest… Giving $855 to a credit card company on an annual basis makes my eye twitch.
Better yet, using a credit card can lead to over-spending.
A 2001 study tested this theory, and found that participants paying with a credit card were willing to pay 113% more for Celtics tickets compared people paying with cash.
Credit Card Pros
I did small experiment on Twitter. I simply asked “Credit Cards… Good or bad? Sell me on your thoughts?”
The responses mainly focused on the rewards programs, and one story about how a credit card ended up saving TheseChicksInvest $1,340!
Credit card rewards programs seem to offer some perks to the disciplined spender.
The Discover It Cash Back Card offers 5% back on purchases at certain locations. Discover will also match all of the cash back you’ve earned at the end of the first year! To many folks in the F.I community this appears to be “free money”.
The Capital One Venture Card offers a one-time bonus of 50,000 miles when you spend $3,000. That equals $500 in cash you can utilize toward travel.
The Capital One Quicksilver Card offers a seductive $150 dollars back on a purchase of $500 or more (if made within 3 months of opening the card). Also, they have a pretty appealing 0% APR for the first 15 months.
Finally, the idea to use a credit card to build your credit score came up a few times. Although true, I’d proceed with caution.
Credit utilization ratio is a big deal when calculating your credit score. Credit utilization ratio is the total amount you owe divided by your credit limit multiplied by 100.
Keeping your credit utilization below 30% is ideal. Here’s where the caution comes in, if you have a credit limit of $2,000, it will only take a $620 purchase to surpass that 30% goal…
Will surpassing 30% for a short time spell disaster for your credit score? No, probably not… but I don’t know many folks looking to lower their credit scores.
Risk vs Reward
Is the risk worth the reward?
Meh, I don’t think so. I know for a fact I tend to over spend when I use a credit card.
Purchasing something didn’t sting nearly as much because I never had to separate from my cash. Buying something expensive didn’t feel real.
Swiping a plastic card didn’t stimulate the pain sensor in my brain like watching my bank account dip.
I was always able to rationalize my spending because I thought I was getting a good deal and I could pay it off soon, but let’s be honest… I never did.
The balance just sat there accruing interest and preventing me from getting out of debt.
With that being said… I was in a different place back then. My financial literacy was much, much lower. I didn’t recognize, or care that I was over-spending.
Now that I understand budgeting and have a small grasp on personal finance, I see the benefit to using a credit card in certain situations.
Cash back and travel hacking are intriguing. Spending money and getting a percentage back seems like a no brainer.
Although, credit card companies aren’t looking to just give money way. Don’t be naive, they know exactly what they’re doing.
Getting you to open the account is only step 1. I’m fairly confident they know you’re statistically likely to over-spend, and they will get that $150 back in due time.
So, what kinda person are you?
Are you sure you can keep a firm grasp on your spending? Or, are you the person who will rationalize spending an extra $150 because you’re getting it back?
Will you be disciplined enough to pay your balances off each month? Or, will you be one of the 43% that pays $855 a year in interest? I mean, $855 isn’t so bad if you got $150 for free… right? (sarcasm)
I think I’ll be staying away from credit cards… for now.
Much like an addict, I don’t need to tempt myself again. It took us a long ass time to get out of debt and I don’t want to do that shit again.
With that being said, I’m not going to turn my nose up at an opportunity. My wife and I haven’t traveled a lot, but I think we might try a travel hack trip in the coming year or so. I can rationalize it for a blog post. (smirk)
What about you? What are your thoughts on credit cards? Do you use them? If so, how and why? I’d love to hear from you!