This topic can be a bit of a hot potato amongst financial experts. Dave Ramsey is adamantly opposed to the use of credit cards. I respectfully disagree with his position - sure, there are some folks who will always go hog-wild charging to their card and these people should steer clear of credit cards altogether. But there are many people who are responsible and disciplined enough to use a card to their advantage. This article is geared towards the latter. If you are in credit card debt or think you can’t control your purchase impulses, stop here and please go read Dave Ramsey’s article.
For the rest of us, the trick is to be brutally honest with ourselves, and decide if we can limit the use of our credit card to purchases we would have made even with cash or check. And then find a card that gives something back.
It is a widely-held belief that people tend to spend more using a credit card than they would if paying cash. It seems to hurt less, as we are a bit more removed from our money when we put it on the plastic. I know this is certainly true for myself, and especially so before I became aware of the phenomena. So does that mean you should cut up your cards, or freeze them in a block of ice? Not necessarily. The important thing is, first and foremost, recognizing the trend. Do you feel freer to charge a purchase than if you had to open your wallet and start laying out greenbacks? If your answer is yes, make a note to become more aware. Just because you’ve made mistakes in the past (I certainly have!) does not mean you can’t fix the problem going forward.
There are many positives to paying with credit cards. Enough benefits that make it worth considering whether you can carry one responsibly, modifying your behavior if necessary. The “short list” of benefits includes:
- Protection. From fraud or unscrupulous merchants. From mistakes (the wrong item was delivered and the merchant won’t make good). From goods broken or damaged in transit. You have much more leverage when dealing with an unhappy situation, because the credit card company’s got your back. While they may not be able to fix everything, they’re a first line of defense if you can’t get a merchant to cooperate. If you’ve paid with a check or cash, you may be completely out of luck.
- Safety. Who feels safe carrying 100s of dollars in their wallet? Even a check can be stolen and forged, whereas most credit card companies limit your liability to a relatively small amount in the event your card is stolen.
- Convenience. If you want to buy something on the internet, by mailorder, or even on eBay, you will find more and more that it is highly inconvenient if not downright impossible to pay with anything else. I’ve been an eBay seller for years, and have seen the distinct trend over the past few years that almost everyone wants to use PayPal. Sure, PayPal can take a check, but it is slow and inconvenient and some sellers are unwilling to wait.
- Rewards. From airline miles to store dollars such as “Nordstrom Notes” to cold hard cash, there are a variety of opportunities to earn rewards just for making purchases you would have made anyway. I carry a card that offers “Subaru Bucks” - with every purchase, I earn 3% back in Subaru bucks. I use these bucks to pay for my Subaru’s normal maintenance and repairs, greatly minimizing the cost of keeping my car.
The key, of course, to using a credit card wisely is self-control. If you can’t use it responsibly, then I agree with Dave Ramsey and I say you shouldn’t. If you are in credit card debt and can’t pay it off, then by all means STOP USING THE CARD. But if you are able to pay off your charges every month, then think about the value the card brings you and consider using it only for those purchases you would be just as happy to make with cash.
There was a time in my life where I used my credit card freely, and I know I spent more that way. I’d buy whatever I wanted, pulling out the plastic with a certain air of confidence. I never carried a balance so I thought I was being completely responsible. After tracking my expenses in Quicken for a few years, and really examing my expenditures, I concluded that I was, indeed spending more than I wanted to. What sobered up my spending really was looking at the purchase summaries in Quicken. Quicken does not care how I paid for something - it is going to tell me if I spent $2500 last year eating out (yes, I did have a year like that. What a wakeup call).
For a while I switched to paying cash and checks for everything I could, but the lure of the Rewards cards brought me back. I simply cannot resist being given cash for something I would do anyway. Now I even pay my health insurance premiums with the credit card - why not, this is a necessary expense for me and I essentially receive 3% back from my credit card company.
The decision to use credit cards or not is very personal. All I can do is suggest some things to consider when making the decision:
In the upcoming weeks I am going to expound the virtues of personal finance software such as Quicken.
Other Articles you might enjoy:
Tags: credit card, debt, money management, Quicken
August 31st, 2008 at 6:30 pm
I’m happy to have found your blog! I just retired 6 months ago (at 44)–there aren’t many of us out there in the blogosphere!
I agree wholeheartedly with your take on credit cards. We charge 100% of everything that is chargeable–down to a cup of coffee at the local coffee house. As a consequence, we have flown for free on each of the 4 vacations we have gone on this year. (And managed free lodging, but that was unrelated to the mileage rewards).
We have set up an automatic payment directly out of our checking account each month to pay the bill off in full each time. So it’s really just like cash–without carrying cash around.
With all this newfound free time and a set budget for travel, we’ll take free travel any way we can get it these days.
September 1st, 2008 at 4:07 pm
I too just found your blog ( through the carnival) and we also retired in our late 40’s to travel the world as a family ( now going on our 3rd year and loving every moment).
Interesting and valuable points. We never used credit cards much and now we avoid them at all costs ( since then we would have to pay in dollars and we are in Europe). We mostly got out of the dollar in 2005 because we felt it would be in decline for some time. It is painful to have to charge something in Europe and pay in dollars ( which are credit cards are in), so we almost never do it.
We have been on 4 continents so far and have only taken 2 flights, so with this kind of slow travel, rewards do not mean much to us. Our life is one big vacation.
So you are right, credit card use value will really vary for each situation and individual. We have just never cared for them, but some people do use them to their advantage.
September 1st, 2008 at 9:20 pm
@soultravelers3 - Thanks for your comment. You bring up an excellent point about the exchange rate when travelling overseas. In addition to what can be a painful exchange rate for us paying with US dollars, most credit cards charge a fee (often buried in the conversion rate). It really pays to be an aware consumer.
And how wonderful that you and your family have travelled so extensively.