Credit Cards: Bad?
by Jason SteeleEvery so often I come across an article like this that features people who believe that all your problems will go away as soon as you get rid of your credit cards. One of the people, Brad Chaffee, hosts the blog Enemy of Debt.
I would characterize this kind of thinking as financial extremism. It may work for some people, but it is probably a bad idea for most. In his blog, you will find articles about how all debt is bad, and how banks make a killing off of you, even if you use reward cards. Frankly, I find most of it to be a bunch of paranoid financial populism.
Who This Might Work For
If you have absolutely no self control, and are completely unable to manage your finances, you should get rid of your credit cards. This strategy is very good for children and adolescents, and those who’s financial maturity is at that level. Frankly, if this applies to you, and you are willing to admit it, I give you great credit for recognizing your shortcomings.
In high school, we learn that criminals break the law because they are unable to correlate their present actions with the possible future consequences. They commit crimes just because they feel like it and are not concerned about the time in the future when they may get caught.
In a similar way, people who habitually overspend, while not criminal, are unable to take into consideration the consequences of their actions, when they make purchases. They rationalize and make optimistic assumptions about future earnings and/or savings to pay off the debt when the bill comes. These people would be well served by getting rid of their credit cards until they can plan their finances wisely.
For others, they do not see the harm in paying the minimum balance on everything. They look at their finances only as far as their next paycheck. People like this are happy to purchase something that can be broken down into affordable monthly payments. The value of the item, the, the length of the payments, or the effective interest rates are not as important as the monthly payment. For people like this, the advice to eliminate credit cards and other debt valuable one.
Use Credit Cards, but Not For Debt
For everyone else, I would advise you to avoid debt, not credit cards. Credit cards are a tool, and they can be used for good or be financially ruinous. If you are able to resist getting swept up in spending, there are many advantages to using your credit card.
First, don’t use it to incur debt. If you pay off you credit card every month, there is no harm in having plenty of credit cards. Chaffee is quoted as saying: ‘“I think if we just use cash and debit cards, it’s a much better idea, Credit cards are too risky, and when something does happen to you and you have a bunch of debt — like for instance when life happens to you, you lose your job or whatever it may be — you’ve got all this debt in your life, whereas if you didn’t use credit cards and you didn’t use debt, then you might be in a little better situation.”
I have been using credit cards for over twenty years, and I have yet to pay interest be cause life just happens. I live within my means and am able to reduce my spending when necessary.
Why Use Credit Cards
Rewards are the obvious reason, but there are several more. Theft protection is a big one, as you can loose your cards without suffering any financial repercussions. Another is purchase protection, as you can charge back items that were not received. There are all sorts of other advantages that you get when you charge something on your card, specifically rental car insurance. It is also easier to track purchases on credit cards that using cash, although a debit card can do that for you too. Finally, it is always nice to take advantage of the interest free grace period that you earn by paying your bill in full and on time. Tonight, I will be purchasing an expensive airline ticket. I won’t actually have to pay for it until late June, as my credit card statement closed yesterday. If you time your purchases right, every purchase is a 45 days same as cash. If you choose the right reward card, every purchase is 2-5% off.
If you handly your money maturely, and avoid debt, there is no reason to abstain from credit cards.
May 8th, 2009 at 05:28
Extremist maybe but that could be because normal is “in debt up to their eyeballs.” I would like to point out that I realize that there are some that do have discipline and more responsible spending habits but have you looked at the amount of credit card debt, as well as the fact that Americans until the recession were saving a -2% of there pay each year? That has only improved in the last 6 months, but if I am not mistaken it is still slightly negative.
7 out of 10 people live paycheck to paycheck and all these numbers prove is that most Americans DO NOT have the discipline you speak of. It is obvious that people are spending more than they make, which would suggest that what I am offering people is needed. They are already doing it your way and look at the numbers. As you stated, it might work for some but not others but maybe you should turn those numbers so that “most people” refers to those that need it. You happen to fall in the minority according to all the numbers.
People need to be educated to become more like you, not told that learning ways to become like you are extreme. I think that makes you more of an extremist than me. One stands to make a lot of money off of keeping people hooked on the plastic. Do you get paid for pushing credit? Just curious, not being rude. Thanks for linking to me and giving me a chance to share my thoughts on your blog. Your opinion is respected and it’s okay with me that we disagree. Have a great weekend!
May 8th, 2009 at 15:44
Just wanted to respond to your claim that debit cards are less protected. When you swipe it as credit it has the same protections as a Visa credit card. Since you write about credit cards I thought you should know this little detail.
FROM THE USA.VISA.COM WEBSITE
With a debit card, also known as a check card, you can shop at many merchant locations without having to carry cash or remember your checkbook and enjoy all the protections of using Visa, like our zero liability policy* against fraud.
Benefits of a Visa Debit card
* Convenience – The Visa Debit card frees cardholders from having to carry bulky checkbooks, multiple identification cards and large amounts of cash.
* Security – Visa offers debit cardholders Zero Liability* in cases of card fraud, theft or unauthorized card purchases for signature-based transactions, provided cardholders promptly notify their issuer of such fraud, theft, or unauthorized purchase.
* Acceptance – The Visa Debit card can be used anywhere the Visa Debit cards are accepted symbol is displayed—at more than 24 millions of locations worldwide. Visa merchant locations around the globe.
* Budget tracking – The Visa Debit card helps track everyday spending as monthly bank statements list how much was spent and where.
* Fast, easy payment process – No checks to write, and no need to present an I.D. or other personal information at the sales counter.
May 8th, 2009 at 15:58
Excellent debate. I happen to fall right square in the middle. We DO have the discipline required to use credit cards, however, consider me extremist if we don’t actually use them.
Thats right. We don’t ‘take advantage’ of the rebate offers. Why? Many, many reasons. Number one being that you can’t get rich off your credit card mileage points. And two being, why take the risk? Why deal with the hassle? ALL of those benefits (theft protection, purchase protection, etc.) come standard with my Visa DEBIT card. Heck, even the interest-free grace period, only the debit period is INDEFINITE.
I don’t know anyone who has a credit card and has never paid interest on it. One of these days, you’ll forget to pay it, or your payment will be lost in the mail, or you’ll spend 18% more (statistically) on your credit card than you would have if you’d spent cash.
I’m not saying credit is evil. But they aren’t out to help you.
May 8th, 2009 at 15:59
It’s great that you’re out there advocating responsible credit-card use, Mr. Credit Card.
But I think you’re guilty of making the very same “positive assumptions” about human nature that you accuse us financial “children and adolescents” of making about our purchases.
And, frankly, I think statistics are against you here. Most people that use credit cards DO NOT pay them off each month. Likewise, most people have very little or no money in the bank. Coincidentally, most of the population carries some sort of long-term debt (cars, boats, HELOCs, etc.), in addition to their mortgages.
So, what you have to understand is that for those of us working the Dave Ramsey plan, we have an evidence-based, principled stance that debt (in this case embodied in credit cards) steals from us. And we’d like to stay as far from it as possible.
I completely agree that credit cards are not evil in and of themselves, and for a certain, small percentage of the population, they can provide a kind of financial convenience. For the rest of the population, credit cards are a kind of exposed wiring just sitting around the house waiting for the right set of circumstances to electrocute everyone in the room.
Here is the core of the problem, and one that creates a catch-22 for your credit-education efforts: as long as people depend on and can rationalize using credit cards, they’ll have no incentive to learn the kind of healthy financial habits that lead to NOT having to depend on credit. On the other hand, that ensures lots of readers for your blog!
The only way to learn how NOT to use credit is, well, NOT to use it.
One year ago, I had $16,000 in CC debt and too-big mortgage that was sucking the life out of me. But as a result of working the same extremist plan that EnemyofDebt uses, I have a positive net worth for the first time in a decade.
And, coincidentally, I didn’t use my credit card even one time in order to make that happen.
May 8th, 2009 at 18:00
Your model just doesn’t work. What if everyone paid off their balance at the end of the month and used rewards witout ever paying interest?….credit card companies would go out of business.
They wouldn’t make a profit if people didn’t carry a balance. Sure, they get the 2% from merchants, but that is not enough for them to keep going. (Not to mention that all merchants likely pass most of that 2% cost on to the consumer.)
If the Credit card company gives you a 2% cash back reward, they are breaking even with the merchant fee, which after expenses, is a loss.
People like you cost the credit card companies money, but they have plenty of undiciplined people to subsidize your dicipline.
Credit card companies are not around for the “common good”. They exist to make a profit, and they will change their policies if too many people use them like you claim.
If you enjoy your interest free 30 day loans and rewards, it does not seem in your best interest to tell people to pay off their balance because their interest payments are keeping your rewards alive.
I know you won’t likely change your mind and that doesn’t bother me.
May 8th, 2009 at 19:54
Hmm, Instead of being spoiled ” I want it now, I get it now” Americans like our society has become, Why are we extremist that have decided we would rather save and pay for something with out debt as oppesed to buying something and paying for it for a very long time. Credit Card companies jack up interest rates because a lot of times THEY did not process the payments on time even though they were in. Why should I pay them extra money when I want to keep that money in my pocket and not live pay check to pay check. Wake up America. Credit Cards are sharks preying on you because you simply do not BUDGET!!!!
May 8th, 2009 at 23:42
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May 9th, 2009 at 01:17
Wow, Mr. Credit Card, in 20 years you have never had an emergencey that you have had to pull out one of your plastic babies to put you ahead? I wish I was that lucky. Why have the temptation of large credit lines hanging around. The world still goes around whether there is credit or not, civilization was not built on credit cards. Credit cards and predatory lending is the reason why we are in this downward spiral, so I guess that makes us all childish now doesn’t it? And I seriously doubt that never in your lifetime will you experience an unexpected job loss, medical issue, death or some other catastrophe…thats just doesn’t make sense Mr.Credt Card!
July 2nd, 2009 at 15:20
[...] Obviously Mr Credit card and I see things completely different as far as the use of credit cards. As you know I feel that using credit cards is not worth the risk, and he feels they can be used responsibly as a tool. We bumped into each other after Jim Cavanaugh wrote Walking Away from Credit Cards, and J Steele, one of his writers, responded with Credit Cards Bad?. [...]