Let me start by saying, I like Dave Ramsey. I am a Dave Ramsey fan. I’ve completed his Financial Peace University. I am prepared to “Live like no one else, so I can LIVE like no one else.” But I have to disagree with him on at least one account – no credit cards at all.
I advocate that you don’t use credit cards. My wife and I switched from putting everything on a credit card and paying the balance off each month to using a debit card. We closed 14 different credit and department store cards. It was one of the best financial decisions we’ve ever made. However, I still have one open credit card and one open department store card.
I have been asked if and when using credit cards makes sense. As a general rule, I tell people to never use a credit card. Mainly because many people don’t have sufficient self-control to manage credit cards. So don’t even put yourself in the situation to be tempted. However, if you can exhibit self-control, then there are three reasons I use a credit card.
My three reasons for using a credit card
- Avoid multiple withdraws or overdraws from bank errors
I don’t like someone having direct access and authorization to withdraw funds from my checking account. For example, I only put my electric, cell phone, and gas bills on my credit card. That’s it. I don’t use it for anything else. My reason is that I have known a number of individuals who had a bank or merchant, in error, make a withdraw several times or withdraw the wrong amount from their checking account. In 99.9% of the cases, you will get your money back. However, that mistake can be costly until it’s resolved. Maybe you won’t be able to buy food or you end up with overdraft fees. - True emergencies
I really hesitate to even mention this reason since it can be too easy to call something an “emergency”. The purpose of an emergency fund is so you can cover emergencies and not have to rely on credit. However, you can’t always get to the funds in time. Let me give you a recent experience. A little over a month ago, I received a call at 1AM with news of a death in the family. Just 24 hours later, my family was on an airplane. We were gone for more than a week. Since we needed to book plane tickets, a rental car, hotel rooms, etc. in such a short timeframe, I relied on my credit card. Having said that, I paid off the total amount of the trip from our emergency fund within one week of returning home. But again, make sure it’s an actual emergency. As an aid, here’s a list of 49 non-emergencies. - Discounts or money back
So I’ve explained why we have one credit card. I want to now briefly explain why we have one department store card – Kohl’s. We love shopping at Kohl’s. I actually interned a few years back at the corporate office and gained a real appreciate for the organization as a whole. As a result, we do a lot of shopping at Kohl’s and receive coupons each month for great discounts. The only requirement to get the discount – use your Kohl’s card. Since we’d be shopping there either way, we might as well get the 20-30% discount. Just make sure that coupons don’t end up costing you more money because you spent more than you would have normally.
If you use a credit card, do so sparingly and pay it off monthly
I really can’t stress this point enough. As I mentioned before, I usually just make the blanket statement that you should never own or use a credit card. But I’m a realist and recognize that there are situations when credit cards can make sense.
What other sound reasons might cause you to keep a credit card just in case?
If you’ve been through FPU, why have you not mentioned the purpose of an Emergency Fund for emergencies?
Study after study shows that credit card users spend up to 20% more then those paying with cash.
It comes from a premise that if you need something, you shouldnt borrow money to get it. And that is what credit cards are. 80% of all “airline reward miles” are never claimed. Its a marketing scheme used to keep you borrowing-even if you are paying it off.
I love my life with out credit. I don’t have a FICO score, and have had ZERO issues because of it.
Behold, the power of CASH!
You’ve listed good reasons to keep a credit card. There are more…
1. If you are dissatisfied with a purchase, paid cash (or used a debit card) for it, and the retailer refuses to take the product back, it’s pretty much a done deal. If you paid with a credit card, especially a credit card with that retailer (Best Buy, department store, etc), then you have all the power. The merchant either takes the item back or you refuse payment. I’ve done this several times, successfully. The most expensive item was a $3k appliance that didn’t work properly. I would’ve been stuck with this item if I hadn’t refused to pay the credit card bill.
2. Emergencies on the road that cost more than you have in your checking account or wallet.
3. Contrary to what Dave Ramsey says, debit cards are not protected in quite the same way that credit cards are. If your debit card gets stolen, you are out the money until (and if) you are able to straighten out the mess. Also, if a retailer mischarges you, you may be out the money forever. There’s the story of the tourist who was charged the local currency amount, but in U.S. dollars, that left him paying $2200 for a $15 t-shirt. His calls to his local police, his bank, the retailer, and the police where the retailer is, gave him no relief. He now owns a very expensive t-shirt. <– But I guess you already covered this situation.
There are others, but since I don't even know if this comment will post, I'll end here…
I love agree especially on #2. You cannot predict some things. You were responsible enough to pay it back.
I once book a hotel and they charge me for a night I did not stay. Since I used my debt cards the funds were immediately taken out, It took forever for them to reverse it.
I wish I had used a credit card
Free extended warranty.
I buy an item on my card and the warranty is doubled up to an extra year. Further, it's covered for breakage. You drop the iPad and smash it? Apple won't cover, but my card does.
This is worth 5%-10% of purchase price depending on the item bought.
Very good point.
Hey Joel, thanks for your feedback and I agree 100%. I greatly hesitated writing this particular post because I believe in not using credit. I actually started this post months ago and finally decided to finish and publish it.
I mentioned in #2, that emergencies should be covered by your emergency fund. But the reality is that that is not always the case. For example, if my car were to break down in the middle of no where while on vacation (I live in a desert so this is a real possibility), I may not be able to access the funds in time to get my car fixed in a timely fashion. Which means, I would have to put my whole emergency fund in my checking account any time that I travel in case I need it.
So I agree with you. Get rid of cards and debt. But if you have the self-control to not spend 20% more (which is an average not law), then I understand why someone will keep one card. I do, and I don't spend a penny more because of it.
Adam, I guess I should have read the comments before commenting myself. I would love to know how the data was collected in this study indicating people who use credit cards spend 20% more than those who don’t. I make smaller purchases with cash, and larger purchases with a credit card. For instance, if I go to a fast food restaurant and buy a drink and a burger, I pay cash. But if I have the family with me and the bill is considerably higher, I pay with a credit card. I do this because I don’t carry a lot of cash. But this study would indicate that I spent the extra $$ because I used a credit card. I would never carry (or even have) a debit card – too risky!
I have had the same issue with a hotel before. It really is frustrating.
Joel – I would be very curious to see the data from just one study that shows higher payments using plastic than cash. While the premise is worth considering, all my research has led me to believe the studies are a myth, no one has produced them when asked. I've read of lab experiments that conclude one feels differently when spending with a piece of plastic than with cash. I've witnessed that behavior myself. But that doesn't lead to to believe than my spending is 1% higher by using credit cards, let alone 10-20.
I agree that if one uses no credit, one can't get into debt. On the other hand, when I spend on a credit card knowing the cash is in checking to pay in full at month end, I don't consider this to be quite the same debt as that which is carried month to month accruing interest.
Joe, you raise a great point. I've heard about these studies for years myself. I would love to see how they were conducted. The danger of statistics and Excel is that you can prove anything you want. Though to your last point, never making the purchase with a debt instrument (read credit card), then you avoid the risk altogether.
That's an excellent point. Your habits would definitely skew the data, but not appropriately so.
Thanks for the input. Your first reason is a great reason to put large purchases on a credit card even if you intend to pay it right off. And you get the rewards.
I think I would try to sell the $2200 shirt on eBay. Someone might buy it for a decent price just because of the story behind it.
Joel, my credit card rewards are in cold hard cash, and I use every penny of it. :-) No wait, one of my cards gives me $$ back on the purchase or lease of a car. We've applied these cash-backs for 3 cars (over a span of years) so far, and are ready to buy another car applying our credit card $$ back. When we buy this fourth car we will have collected over $8k back. We've collected another $4k+ in cash rewards. While we are financially very comfortable, I still can't refuse the offer of $12k being handed to me. I have never paid a penny in credit card fees, interest, penalties, etc. I see a lot of advantages to credit card use, and none of the disadvantages. However, for the person who may be vulnerable to over spending, a credit card could be detrimental to their financial health.
Interesting read. I wouldn’t say that Dave Ramsey is wrong about credit cards, but I would say that his teachings do not match your preferences. There are alternatives to address your concerns.
For reason #1 you have a card to handle automatic withdraws because you do not want other having access to your account. An alternative is pay these bills using bill pay. This way the money is pushed out on a regular basis and you remain in control.
For reason #2: If you have a money market/savings and checking account at the same institution. You can have access to your emergency fund in no time. All you have to do is go online and make the transfer.
Hey,
You raise a very good point about Dave (that my preferences are slightly different), as well as two simple solutions to eliminate the credit card. I’ve debated about using bill pay for my three bills (I use it for several others), but these three bills aren’t fixed. So I’d have to send the right amount each month and lose the automation. This is where the lazy part of me kicks in. And you are absolutely spot on with having the emergency fund at the same institution.
Thanks!
Most debit cards are still run by VISA or Mastercard. You dont need to use a pin and when you dont it acts as a “credit” transaction instead of immediate withdrawal, and many offer rewards all the same. I know mine does.
Just like threatening to stop payment for a purchase, you can threaten to take your money elsewhere if a bank offers you no assistance. There are so many options that credit cards really arent a necessity. And for 99% of people, they lose money with credit cards. Rewards give you very little in return often 1/100th or less of what you spend. This is the arguement a woman likes to make to go shopping at a store just because its on sale “think of all the money we will save”…
Being broken down on the side of a road isnt an excuse, because you need money to travel in the first place, your car wont be fixed till the next day AT LEAST, and so there is plenty of time to call your bank if you come up short. Anyplace that has a cc machine has a phone connection or wifi, and you wont be leaving before 8am the next day anyway…
And finally..what on earth did people do before credit cards????