Personal finance commentator Dave Ramsey says that “responsible use of a credit card does not exist,” and advises consumers to cut up their credit cards. Check out his article “The Truth About Credit Card Debt,” in which he elaborates on these views, here.
In general, Dave Ramsey offers solid financial advice, but I humbly disagree with his views on credit cards. Here’s why.
Of course financially irresponsible people don’t use credit responsibly. If they did, we wouldn’t brand them financially irresponsible! I submit that credit cards, when used responsibly, have significant benefits. For instance, a number of credit cards, including the Citibank Dividend Platinum Select and the Chase Freedom card, offer 1-5% cash back on all purchases (the amount of cash back varies based on the type of purchase; I use a Dividend Platinum Select card and I’ve found that I average about 1.9% cash back across all purchase categories). Getting cash back on stuff you would have bought anyway is a smart and responsible tactic.
There’s another way that credit cards can benefit you if you use them responsibly: float. Most credit cards don’t levy finance charges as long as you pay your balance off at the end of the month. This means that, in effect, you get an interest-free loan from the date you charge the purchase to the date you pay it off. You profit from float by placing the money in an interest-bearing account until the bill comes due.
It is definitely bad to increase your spending to take advantage of cash back or float. As Dave Ramsey points out, “If you were using a credit card at 5%, you would have had to have spent $80,000 to get $4,000 rebates on new cars that lost $6,000 of value when you drove them off the lot. That is not a good deal!” I’m not sure that buying an $80,000 car is a smart financial decision under any circumstances, but if you’re going to blow $80,000, you might as well have the credit card company hand you 5% cash back on your purchase. Am I right?
Dave also advises his readers that “you do not build wealth with credit cards… When you play with a multi-billion dollar industry and you think you’re going to win at their game, you are naive. You cannot beat the credit card companies.”
The credit card companies are smart, and they are not interested in charity. They are cold and cruel and machine-like and will chew you to pieces if given the opportunity. But here’s the thing: you do have control over how you use credit cards. The credit card companies offer a set of conditions which they know will entice millions of people to overspend themselves - low intro rates which skyrocket after a few months, high penalties for late payments, absurd fees for exceeding your credit limit, etc.
The credit card companies offer temptation which it is our job as consumers to resist. We, in the end, maintain control over whether or not we make late payments, exceed our credit limits, and so on. I submit that a financially responsible person is capable of looking temptation in the face and then walking away. In my opinion, when you are able to do this, you have truly earned the title “financially responsible.”
Just so nobody misinterprets what I’ve written here, I’d like to emphasize that it is, in general, a good idea to pay off your credit card balance every month. If you are going to buy stuff you can’t afford on credit, you’re probably better off cutting up your credit cards!
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April 29th, 2008 - 6:49 am
I couldn’t agree more! I wrote a post similar to this recently (link in my name). So much ‘guru’ advice is dumbed down. It assumes that no-one has the discipline to use credit cards sensibly. We’re not all dumb and one size doesn’t fit all. Glad your post was an editor’s choice!
April 30th, 2008 - 9:20 am
Dave Ramsey isn’t wrong - you just aren’t his target market. Like anyone selling something, Dave is targeting people in debt who are looking for a plan to get out. I’ve been on all sides of this: totally out debt, in control of debt, and out of control with debt. Dave offers a needed emotional focus for those who feel out of control. I like Dave a lot, but I have adopted his plan as needed to my situation.
April 30th, 2008 - 4:31 pm
Um yeah, I disagree. Credit card companies frequentely “lose” your payments and charge you interest. Just get a good checking account that pays interest AND cash back (I make about $30-$40 a month with my USAA account)
April 30th, 2008 - 4:37 pm
May 1st, 2008 - 7:24 am
I’ve earned over $300 in cash back this card year with my AMEX Blue Cash. Carried no balances, paid no interest, and got free money back.
How can you beat that?
May 5th, 2008 - 1:11 pm
Having recently completed the Financial Peace University course, I would just like to interject here that there are many reasons using credit cards is not wise, but the primary one as I see it is that it is much more difficult to part with cash than to hand over a credit card. When using a card you are more likely to purchase things that you don’t need, and while you may not think you are spending more, statistically the majority of credit card users spend about 25% more than those who pay with cash.
While you may be responsible at this point in your life, and I hope that you always will be, not very many people can stay in that mode forever, and many get into a deep pile of debt that takes years to dig out of through the use of plastic. It takes more work than most people are willing to put in to wisely manage credit card use, so I still think the advice is good. Just my opinion.
TM
May 16th, 2008 - 8:41 pm
I did really good with my credit cards for a very long time when we had no debt (except for our mortgage). I paid them off every month in full and earned rewards. Everything was going smoothly until we hit a rocky spot in our life and in order to get things back on track we had no choice but to use our credit cards. If I had it to do all over again, I’d still choose to do what we did. But the rewards I earned were totally negated by the interest we were paying once we plunged into debt. Also, I do find it is easier to spend when you have plastic, even if it’s a debit card.
May 27th, 2008 - 9:16 am
Dave Ramsey spouts the “If you use credit cards instead of cash you will spend 12-18% more.” statistic once again without citing any sort of source. I wrote a post about this on my website, but the long and short of it is that this isn’t really proven, and it completely differs from person-to-person.
Yes, there are some psychological attributes of credit cards that MIGHT cause you to spend more with them, but those do not affect everyone, and you really just have to know your own spending habits.
If anyone is interested, you can read my findings here: http://poorerthanyou.com/2007/10/12/do-we-spend-more-when-we-use-swipe-plastic/
May 28th, 2008 - 2:18 pm
I have to agree that for many using credit cards responsibly isn’t something they can do. There are some people that are good with money, can do credit card arbitrage, and handle credit responsibly, but the average joe consumer does not. Studies have shown that.
The 12-18% number isn’t sourceless - it is a Dun and Bradstreet study. Here it is discussed elsewhere:
LINK
May 28th, 2008 - 3:04 pm
My view is that Dave isn’t wrong; he just presents a series of smart ideas for people looking to learn about finances and improve their financial situation. One of his ideas is to avoid debt in all forms. Debt makes us more likely to spend more on things we don’t need, and often (yes you have a 26 day credit card grace period) adds to the total cost of a good/service by the addition of fees and interest. Yes fees and interest can be avoided, and yes if you are disciplined you don’t spend more, but by far the greater majority of people gain by avoiding forms of debt when possible. Advice is just that, advice. We use rewards cards and collect a little cash back too, but if you are teaching someone how to win financially, often times from the ground up, debt in all its forms is not the answer.
May 28th, 2008 - 5:55 pm
May 28th, 2008 - 6:25 pm
@Pete
Thanks for letting me know where that study was from. I’d still like to get a hold of the actual study myself a look at it, but it’s nice to at least know what I’m looking for. My complaint with that was not that it was sourceless, but that Dave Ramsey likes to spew that statistic without ever saying what the source IS. So thank you for clearing that up for me!
May 29th, 2008 - 3:26 pm
I agree with this post. I’m not a statistic and I spend less with my credit card than I ever had with cash. Cash carried no responsibility or accountability for me. I found that I monitered what I spent with Credit. ,well it was meant to be spent. I prefer the protection my cc offer as well. I get 3% back, I only use one, and it has never carried a balance. Notice I said I, your mileage may vary as a Ramsey zealot and you can stick to cash. Just don’t shove it in mine.
June 11th, 2008 - 12:07 pm
My two cents: Yes, Dave Ramsey’s solutions can sound very “one size fits all”, when of course, there are responsible credit card users. My argument against credit card use is a societal argument. Mike, you and the other credit card users who are getting rewards back, are not going to like what I have to say. While I don’t know the exact numbers and I don’t have the research to back up this up, I believe it is common knowledge that more people struggle with credit cards then master them. Given this fundamental truth, I believe that “responsible” users help the credit card companies perpetuate the myth that consumer credit can be a good thing. I am going to arbitrarily use the 80/20 rule here and make up an analogy to go with it! If heroin pushers offered “rewards” for using their drug, 20% of people would use heroin, reap rewards and suffer no ill effects. 80% of people would use heroin and become addicted and suffer all the horrible repercussions thereof. And the heroin pushers would laugh all the way to the bank. As a society, we have decided that a population of heroin addicts is not a good thing and we have outlawed heroin. I think consumer credit is exactly the same thing. I will go even further and say that the 20% who are being “rewarded” under this system are as responsible as the pushers are for the degradation of the 80%. There is personal choice and then there is social responsibility. I truly believe that consumer credit is a societal issue that this nation needs to address. Yes, fat chance, I know, especially as I seem to be the only person in the universe to hold this opinion!
June 11th, 2008 - 12:26 pm
@Bettsi - The best stats I could get say that 55 million Americans pay off their balance monthly, and the other 90 million carry a revolving balance. That puts it closer to 60/40 than 80/20.
Also “Of the households that do owe money on credit cards, the median balance was $2,200 — meaning half owe more, half less. (Source: MSN Money)”
So half of people that carry a balance - that balance is less than $2,200. So it seems that it’s really 80/20… in the other direction.
June 11th, 2008 - 3:07 pm
Mike, I am in a very poor position to argue. Mainly because you are living the life I would like to- thumbing your nose at dreary employment and collecting wealth towards freedom while I am a slave to debt! So, while I still believe, in my heart of hearts, that consumer credit is more evil then good, I have no authority to stand on. Awfully nice to meet you, btw. I will be a regular reader here.
Stephanie, thanks for those numbers. A couple of years ago, $2,200 didn’t seem like a lot of debt. It feels bigger today.
June 11th, 2008 - 9:30 pm
By the way, for any readers who are wondering what’s going on here, Bettsi and I have exchanged a number of comments across this blog and her blog. Click on her name and search for the post entitled “Responsible Credit Card Use” to see the rest of the discussion.