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
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.