The Total Money Makeover and The Cash Only Diet

by Tim Parker on March 1, 2010

Should you give up credit cards? Some thoughts on this.

I’ve long been a proponent of the responsible use of credit cards. I’ve written articles about using your credit card to stockpile rewards points, build good credit, and learn how to spend responsibly. I wouldn’t recommend anything that I’m not doing myself. I can report that I have used my credit cards for just those purposes.

The Total Money Makeover and The Cash Only Diet

Total Money Makeover

I now have to admit that I’m no longer so sure that I’m right. I’ve been reading Dave Ramsey’s book, “The Total Money Makeover”. He makes some very compelling arguments against the use of credit cards and if we look outside of his book for some statistics, it’s hard to say that he’s wrong. According to the Federal Reserve, 78% of all households have credit cards and of those 78%, 60% are holding a balance. These statistics tell me two things: First, credit cards are a way of life. They are ingrained in our society just as fast food and baseball. Second, for every 10 people you and I see each day, 6 of those have credit card debt. 60% of our country is purchasing what they cannot afford. Something seems wrong with that.

People like me have advised using credit cards to build rewards points and have suggested using 0% balance transfer credit cards to lower one’s debt load. Seems okay if the balance is paid in full each month. Dave Ramsey cites a study that shows that we spend more money when we use credit cards instead of cash. Cash is more tangible and we’re less happy about parting with it. Most households need to spend less. Maybe using cash is not such a bad idea.

How about the idea that credit cards allow young people to learn healthy financial habits? In light of the 60% of households that hold a balance, is it working? I don’t know how anybody could argue that buying what we can’t afford and then paying 10% to 20% interest on it constitutes responsible spending habits. Oh, and one more. The widely held idea that debit cards — cards that pull directly from your checking account, don’t afford the same consumer protections as credit cards is simply false. In his book, Ramsey publishes a statement from Visa saying that no matter what kind of card, the right to dispute charges is the same.

Is It Working?

You, me, and most others live in a world where credit cards are currently how we transact money. You can’t reserve a hotel room with cash, and even a trip to your favorite fast food restaurant is often paid off with a credit card. These days, it’s virtually unheard of to use cash.

But Dave Ramsey makes an argument that can’t be ignored. “Is it working?” As of the beginning of 2010, we’re living in a world where we are working harder for less money. This is largely because we’re trying to clean up the pieces of an American economy that imploded because of credit. People and companies have been spending or lending money that they didn’t have. While I’ve not seen any statistics on this, we have to assume that if not for irresponsible use of credit, we wouldn’t be in the predicament we’re in right now, or at least, we wouldn’t be experiencing things to this extreme.

So my final point is this: while I’m not yet done with the book “The Total Money Makeover”, I do feel that my ideas about credit have largely changed. I think I’m going to try cash only for a few months. Talk is cheap, right? But if it works in practice and I end up spending less, then I might just be saying goodbye to my credit cards.

Here are more thoughts on how to live debt free with no credit.

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{ 4 comments… read them below or add one }

1 Bucksome Boomer March 2, 2010 at 7:03 am

I’m a Dave Ramsey fan (Financial Peace University graduate here) but I still have a credit card and use it for large and/or online purchases.

I want the protection of the credit card in those cases. It helped when I had to dispute a $300 charge for an item that was never delivered and I couldn’t get the merchant to make the credit.

2 JD March 2, 2010 at 9:46 am

I’m also a Ramsey fan, but feel having a credit card is necessary in lots of situations. As Boomer said, you’ve got more protection for large/online purchases (and your funds aren’t tied up during a dispute, as they would be with a debit card). Also, there are times/places that you can’t use a debit card (particularly when traveling). So I don’t worry about using a card, as long as it’s paid in full. The insanity is those who treat “available balance” as income and have multiple cards they’re carrying a balance on.

Also… math check. 6 out of 10 people you see are not carrying a balance (based on the way you phrased the study). 60% of the 78% who have cards are carrying a balance. So 8 of 10 people you see have a card… and 4.5 of 10 that you see carry a balance.

3 Broke by Choice March 8, 2010 at 3:25 pm

I am also an FPU graduate and I have been applying Dave’s principles for since July 2007 (32 months). I cut up my credit cards when I first decided to get out of debt and haven’t used them since.

I have not had any problems using a debit card. During this time I have traveled to Asia, South America, the Caribbean and throughout the US with no problems.

4 Denise March 29, 2010 at 12:38 pm

The one thing that isn’t being discussed is that I know many people living off credit cards to compensate for their lack of a good job. The national average income for a single person or a sigle mother with one child, according to our government is $34,000 (2006). Many people don’t make that for income, let alone businesses paying grad students a 30 year-old income of $30,000 entry-level position. Even when the economy was doing good, businesses refused to pay an educated employee their true worth. Look at the governement salaries, and local and state government positions. They are the only ones, practically, that make good money, unless you’re in healthcare, an attorney, a CEO, etc. I credit cards are being used to compensate for the basic income necessary to just survive and therefore, having credit cards are a false sense of security, giving a consumer a feeling that they can buy whatever they need, but can never get caught up because they don’t make enough income to begin with AND not to mention, 20-30 years ago, banks would let the consumer cut up their credit card and the consumer had to promise not to charge anything, and the consumer was then allowesd to pay off their balance at a low interest rate.

Banks and credit cards these days are legal loansharks craving for money and will go as far as stealing from the consumer for the recent lack of banking regulations in place to keep the banks accountable and to protect consumers.

Nobody seems to be talking about how students go to school for the purpose of getting a good job, however, with the high cost of education and the low income levels even with an education, keeps us all in debt, almost never able to access the American Dream, until we’re at the age of retirement.

These business owners/CEOs need to pay employees what they’re worth.

In Australia, a person who works in a grocery store makes $40,000 and when they obtain a Bachelor’s degree and are in Banking their salary jumps to $90-100,000. Do you see what I’m talking about? Spread the wealth…..people! or else we are slaves to the wealthy.

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