The Credit Card Debate

DFF = Debt-free Friend                                                                                                                                                                                                                                                            
DH = Dear Husband

Context of my bias against credit cards: Our debt & Dave Ramsey

Our journey out of debt was inspired by the timely loan of a CD book. DFF, who had tried to drop hints about financial management to us over the years, left the cellophane-wrapped package with us after a brief visit to our home in the spring of 2012. The Total Money Makeover, by Dave Ramsey. I looked at it, there on the table by the front door, with a sense of burden.  I’ll have to listen to it at some point, I thought.

Several weeks later, the packaged CD book was still on that table, and I decided to deal with it – more to relieve a sense of obligation than anything else. I opened it up and listened to it in my car on the way to work. A seismic shift occurred somewhere at the core of my being during that morning’s commute. It really was that significant. I sat down with DH the next evening and got him to listen to it with me. Eventually, I drifted off to sleep on the couch, but he kept on listening late into the night – as riveted as I had been.

Ramsey doesn’t mince words when it comes to credit cards. “[W]hen you play with snakes, you get bitten,” he says of credit card companies. “I have heard of all the bait put out there to lure the unsuspecting into the pit. A free hat, airline miles, brownie points back, free use of someone else’s money, a discount at the register – the list goes on to get you to sign up for a credit card. Have you ever asked why they work so hard to get you involved? The answer is that you lose and they win” (Ramsey, 41).

Arguments against credit cards

There are several points that Ramsey and others raise in objection to credit cards:

  • There are fees associated with credit card use.
  • Credit cards have high interest rates.
  • Retail prices are inflated to cover the transaction fees of credit card use.
  • Studies indicate that people consistently spend more when they use credit cards as opposed to cash or even debit cards. So the points people earn are offset by the greater amounts they spend.
  • The whole credit card industry normalizes debt to the point that most of us see it as an inevitable part of life.
  • Credit card use is often the gateway to a life lived in debt as people are enabled to buy more than they can afford.
  • Credit card companies profit from those who can only make minimum payments.
  • Average levels of personal debt have grown exponentially since credit card use became common in the second half of the twentieth century. Severe distress has too often been the result.

The “build your credit myth”

Furthermore, credit card use, which before 1970 was very rare, has become “necessary” to establish a good credit score. “The FICO score is an ‘I Love Debt’ score,” says Ramsey. “According to the FICO Web site, your FICO score is determined by:

  • 35% Debt Payment History
  • 30% Debt Levels
  • 15% Lenghth of Debt
  • 10% New Debt
  • 10% Type of Debt

So if you quit borrowing money you will lose your FICO score” (Ramsey, 39). Of the “build your credit myth”, Ramsey says, “This myth means we have to get debt so we can get more debt because debt is how we get stuff” (38).

Arguments for credit cards

DH and I set a new course for our finances as soon as we had finished listening to and reading The Total Money Makeover. Shortly after I started to write about our journey out of debt, I also started to read other blogs about personal debt and finances. I was surprised at how rare a stand against credit cards actually is in the personal finance community. Most bloggers support a responsible use of credit cards. Here are some of their arguments against the anti-credit card position:

  • Credit card companies are not evil. They are providing a service.
  • Credit card debt is a matter of personal responsibility. Credit cards are not to blame for personal debt; people are.
  • If you use credit cards responsibly, you really do benefit from the rewards offered, like cashback and airmiles.
  • The responsible use of credit cards raises your credit score. To get a mortgage or a business loan, it’s very beneficial to have a good credit score.
  • Credit card transactions are convenient. It is so much easier to carry a piece of plastic in your wallet than to keep refilling it with wads of cash.
  • Credit card transactions are highly protected. Credit card companies have an excellent record when it comes to dealing with theft and fraud.
  • Credit card use makes it easy to track spending. It offers a visibility that facilitates budgeting and planning.
  • Credit cards don’t have to be the gateway to a life in debt. They can be a helpful tool if used properly. Efforts should be made to educate people to use credit cards well instead of advising them to stop using credit cards.

MMM’s manipulation of credit cards for profit

“Unlike the beginner ‘get-out-of-debt’ personal finance ranters, I’m actually a fan of responsible credit card use,” says Mr. Money Mustache. He is also a fan of beating credit card companies at their own game. In a post entitled Gaming the System with Rewards Credit Cards he outlines his own experiment in profiting from credit card companies. “Ethically, I view it as a small win for the forces of good over evil,” he says of his $500 gain. In the same post, he cautions his readers about the possible pitfalls of this sort of “gaming”. “I don’t recommend credit cards at all to anyone who ever finds the need to run a balance and actually pay interest. They are too dangerous and expensive to use as a source of borrowing.”

Where do you stand?

Is it because I’m a “beginner” who is still getting out of debt that I side with the anti-credit card camp? I don’t think so. I personally don’t think I will ever try to benefit from rewards points or from beating the credit card companies at their own game. I cut my credit card a few months ago, and the only reason I would ever get another one is because it really has been a source of inconvenience not having one. “The Visa debit card . . . give[s] you the ability to do virtually anything a credit card will do,” says Ramsey (40). That’s not true in Canada – at least not yet. Especially when it comes to online purchases. Most Canadian businesses have not updated their methods of payment to accept Visa debit. (Why not, Canada?) There have been a few times when I’ve had to go to DH, whose opinion differs from mine, and ask him to use his credit card for an online purchase or payment I can’t otherwise make. But in a way, that makes me more adamant. What is it with how interwoven our society has become with credit card companies? So for my part, I’m willing to put up with the inconvenience – for now.

Where do you stand on the credit card debate? It’s an issue that has prompted nasty commentary on some fronts – which is bizarre. Let’s avoid that. Are you anti-credit card or pro-credit card? Neither? Somewhere in between? I’m very interested in knowing the range of opinions out there.

 

 

 

Comments are welcome!

I would love to hear what you have to say. Feel free to share your thoughts, offer advice, disagree, or ask questions. (Disrespectful comments will be deleted.)

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10 CommentsLeave a comment

  • Oh, my dear friend, how timely a post this is. For nearly 5 years I lived the “Credit cars are evil” mantra…then we made our last DMP payment and my perspective changed. Could I responsibly use credit cards? Could I beat the system? I tried my hand at it……and it’s not going well. Credit cards are not for me……I have my own post in the works with more detail – after which reading you will wag your finger at me and say, “I TOLD you so!” 🙂

    • Credit cards aren’t the problem–it’s how you choose to use them that is the problem. We still do a budget but use the cc to pay the bills, etc.. The monthly spreadsheet has our budget amounts and we deduct as we spend. Our money stays in our checking account until the cc bill appears and then it is paid in full. We don’t spend more because we have a cc. If it’s not in the budget, we don’t buy it. Perhaps that isn’t the norm but it can be done. As a result, we have enjoyed the cc rewards. It’s all about having a budget and sticking to it. I see no difference in using a cc or a debit card. For us the result is the same–we aren’t spending our checking account money AND using the cc willy nilly. But for those folks who can’t resist using them whenever they have a spending urge, I can see just eliminating them altogether. Other than the credit card, we’ve followed the DR advice over the years–in fact, well before he came along. We have no debt, paid for cars, paid for college educations for 3 kids, etc.. It’s all about living below your means and saving.

    • I know others like you who say – and I believe them – that they don’t spend more because of credit cards. I admire your self-discipline! It sounds like you’ve had it all figured out for a long time, and it also sounds like you’ve reaped the rewards of your wisdom. The one argument that could still be raised from an anti-credit card position is that by using credit cards, you support an industry that profits from chronic debt – from people who have been trapped in the minimum payment cycle. The rebuttal to that argument is that credit cards are about personal responsibility, not corporate manipulation. I’d be interested to know your thoughts.

  • I’m in the camp of whatever works for that person. I like the convenience for tracking against my budget (although cash envelopes might work here) combined with my cash back rewards. I honestly don’t think using cash would change the amount I spend either. Since I’ve used credit all my life, having cash in my hand is meaningless. It affords no special significance to me. It’s just paper and I can’t put a wad of bills into context. It’s only when I look at my bank balance, debt and investment levels that these figures have any meaning as I can compare them to targets we’ve set. If it were not for cash rewards i would feel differently though. Other types of rewards programs do not have much meaning for me, since we are not in a shop or travel mode. Great analysis of the pros and con’s of each!

    • Thanks for your comment, Debt Debs. It’s interesting that you say “having cash in my hand is meaningless.” A commonly accepted idea is that using cash is effective because as you literally see it dwindle in your wallet, it makes you wary of spending more. Perhaps this doesn’t apply to everyone. Good food for thought!

  • I know it’s not the cards that are bad, it’s me. :-/ I clearly can’t use them responsibly so it’s all or nothing for me. I absolutely believe in having an excellent credit score, so once everything is paid off (progress is slow but steady), I will keep my cards open and use them for VERY small purchases once or twice a year to keep them active in my credit history.

    I did SO WELL for about 2 years until I went on a little bender and I’ve literally been paying for it ever since. I’ve been chipping away at the balances a little bit each month and I think I need to start snowballing again. I have to be free of this concrete yoke around my neck. It’s killing me.

    I wish it was realistic to live an all-cash life. For me it isn’t. I will probably never pay off my mortgage; I figure I am doing well if when I sell the house in 10 years, I get anything back at all. I’ve long since stopped believing in real estate as a money-making venture, but it sure beats paying apartment rent, IMO.

    I also just had to get a car loan because my clunker was just plain unsafe. Had to forget about a new car even though the rates were so attractive … all I wanted was a basic small SUV and I wasn’t going to get out for less than $22,000 no matter the brand. Just too much for me. And not worth the risk to buy a super clunker I could pay cash for. I need a reliable car. $22k may not much compared to what a lot of people pay for cars, but I had only budgeted $250 a month for a car payment. I turned over every rock and was totally obsessed with finding a “deal” on a good used car. Luckily for me I found a no-fee auto broker through my work who made the process totally painless AND she found me a great used small SUV only 3 years old with insanely low miles and priced at nearly $3,000 below Kelley Blue Book. Combined with what little cash I got for my old ride, I kept my payment to $250 a month, and it will be paid off in 5 years.

    One less thing to worry about now. Trying to breathe.

    • If you look at Travis’ comment above, you’ll see that he too struggles with credit cards – even after having paid off $109,000 in cc debt. Some people deal with the credit card dilemma (wanting to keep it but not trusting themselves with it) by keeping it locked away where it takes effort to access it, or by putting a “DON’T USE” note on it. It would be interesting to analyze what motivated that “bender” of yours. I think the more you get it figured out, the less likely it is to sneak up and take over like that again. As for the concrete yoke, I just wish it would fall off of you. (I’m worried by the words, “It’s killing me.”)
      I’m glad you have a safe car, and I hope that you surprise yourself and pay it off well before those five years are up. How is that breathing going? All the best, and thanks for stopping by

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