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A Breakdown of The Credit Card Debate





There is always a good amount of debate online about whether credit cards are a good idea to have or not. The debate can get pretty heated, and the reason is obviously because when we’re talking about personal finance, the choice is personal. I wrote about my hatred of credit cards last week and then happened to have a conversation about credit cards over the weekend.

One of Sean’s particularly loquacious friends came over Sunday afternoon to have some food and chat. Ryan is a brilliant individual and always has a ton of things to say on any topic brought forth - his opinions always start out murky (to me) and end up being incredibly insightful and well-developed. Somehow we got onto the topic of consumer debt vs. real estate debt, and I voiced my opinion on credit cards early on. We then went on to talk in detail about the pros and cons of credit cards.While having this conversation didn’t teach me anything new, having the opportunity to hash out the details of my argument with another person (IRL!) gave me food for thought, and this blog post here.

Many bloggers have posted their opinions on credit cards, and their personal choices are all across the board. In the end, I think the choice to have them or not comes down to a few key points, built on different arguments. Below I present a few questions to ask yourself to help you decide if credit cards are right for you.

1. Do you spend more with a card or with cash? Does it matter?

The cash/card debate seems the strongest of all of all arguments - especially with passionate Dave Ramsey followers. I happen to adore Dave, but don’t follow what he says as law. (It is my life, after all, and following generalized rules isn’t always for me.) The strong argument against cards is that with credit cards, consumers are statistically found to spend 20% to 30% more on every transaction (VISA study, 2002).

But I’ve heard an equal amount of bloggers and readers say that they live on such a tight budget, their spending isn’t effected by whether they are carrying cash or plastic. In fact, some people argue that cash can sometimes feel like it’s “burning a hole in your pocket,” something we’re not as psychologically inclined to feel with credit cards. In the end, you need to ask yourself how you react to spending on a credit cars vs. spending cash. PT at Prime Time Money asked us which one is more visually appealing, a credit card or a wad of cash? Honestly, I am so disconnected from cash, I didn’t feel ANYTHING about either picture. (What a shame?)

Personal: For me, the debit card is the way to go here. I have never carried cash (I got my first debit card at age 13) and am very detached from it. I also refuse to carry credit cards, so I’m left with the debit card (I guess that’s cash). I am careful with my spending, so I doesn’t matter that it’s a piece of plastic. To me, carrying a debit card is exactly the same as carrying cash. I always know in the front of my mind how much is in my back account at any given time (yes, nerd here) and I know the money will draw straight from checking, so it works for me.

2. Are you good about paying bills promptly? Or would you rather have no bill at all?

When it comes down to it, a credit card is a bill you have to pay each month, and cash is something you must have before you can spend it. I like the approach of spending only what I have, but as a reader at Get Rich Slowly pointed out, it is possible to track your credit card spending like you would do in a check register, and make sure you can pay the bill each month anyway. But you have to make sure that you remember to pay the bill each month on time, and have to have a regular enough income to make the bill payment each month (after all, “I have a credit card but I pay it off every month” doesn’t work if suddenly you can’t).

Personal: I am good about paying my bills on time, but there was a time when I wasn’t. Because there was a time when I was scattered, I am now somewhat scarred by the experience, and am actually wary of bills coming in. I now pay off all of my bills within a day or two of when I receive them, but I would rather just pay none at all. I think it would be terrifying to get a bill every month for one month’s worth of expenses. What if the bill got lost? What if my payment can’t go through in time?! (This is scary to me! Even with all of my bills online, I just don’t trust.) No… regular expenses by credit card bill are a big no-no for me.

3. Are you interested in building your credit? Is it important to you to have a high FICO score?

Another point to consider is whether a FICO score is important to you or not. If you listen to Dave Ramsey at all, you will know that he advocates making FICO irrelevant and I agree with him. But you have to decide for yourself. If you chose to have some consumer debt in your life, you will want to have a good FICO score to ensure you get good interest rates, and that you don’t get ripped off with fees and other charges that are applied to sub-prime loans.

Personal: I agree with Dave Ramsey here, BIG time. If you pay for everything in cash, there is no need to ever have a good credit score to begin with. Besides the fact that there are loads of errors with FICO scoring and records, I just don’t give a damn personally about whether my lending record is good or bad.From now on I intend to buy only with cash, and therefore the credit score is irrelevant to me. And yes, even with buying a house, if you’re responsible with money and can reasonably afford the house payments on a 15-year fixed mortgage, you do not need to have a credit score (you can be approved by going with a company that does manual underwriting).

4. And finally, how much does security mean to you? Does using a credit card give you peace of mind?

The final question here is about your heart. Risk is measured by the heart more than anywhere else, and if you sleep better at night knowing that your purchases are made on credit card, then more power to you.Some people are more comfortable knowing that under their credit card plan (most cards offer this), their stolen electronics will be replaced or their lost luggage will be reimbursed. For some, I can see how a credit card can be like a simple insurance plan. I can also see how having thousands of dollars taken out of your credit card in the case of identity theft would be easier to resolve than having thousands taken out of your checking account - some people prefer to expose their bank account to the world as little as possible.

Personal: For me, because I’m not comfortable with credit cards and don’t care about my credit score, once I’m out of debt I will close my final credit card and freeze my credit. I will still check my credit reports for free (one from a different company every 4 months) and will monitor my credit closely, among other things. (This is the hacked do-it-yourself version of LifeLock for people like me who would rather monitor than pay someone else to.) Locking down my credit and monitoring it regularly makes me feel more secure than a credit card ever will.

I guess in the end, this is more a rant about what I feel about credit cards, and more specifically my arguments against the popular reasons to have credit cards in your wallet. I hope some of this was interesting for you… even better, I hope it was helpful for you! Let me know if you plan to, or do, use credit cards or not.

Other bloggers weigh in:

Related Posts from around the PF blogosphere:

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It has been noticed that when people work from home, they tend to use their credit card a lot, getting out only once in a while to renew car insurance etc.. As a result, most home mortgages pile up during this period as well as loans.

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Comments

14 Responses to “A Breakdown of The Credit Card Debate”

  1. Rachel @ Master Your Card on April 2nd, 2008 6:04 am

    I have come across some strange opinions about credit cards in the past. One person that I came across said that he felt his credit balance was his money and that when he had paid a chunk off his credit card debt it meant that he now had that money avaiable to spend on himself again when he needed it. He thought that interest was stealing and he shouldn’t have to pay it. I can hardly imagine banks just giving us as much money as we like for free now, can you?

  2. Stephanie @ PoorerThanYou on April 2nd, 2008 6:46 am

    Great article, very well thought out. Like I said in my blog post on the subject, as long as you know yourself, that’s what matters - and you clearly know what works for you.

  3. The Executioner on April 5th, 2008 9:35 am

    If you are the kind of person who enjoys the convenience of debit cards, then you can use a credit card like a debit card and reap a few additional advantages.

    1. If a mistake happens (say a merchant bills you twice, or bills the wrong amount) or if your card gets stolen, debit cards have a big downside: the money gets debited from your account immediately, which can decimate your checking account balance. With a credit card, you don’t have to pay the bill until the statement cycle closes (and the grace period expires). This gives you extra time to sort things out.

    2. Credit cards usually have better buyer protection guarantees. Debit cards have been catching up here, but still have some inherent disadvantages. If you make a purchase and don’t believe the merchant has fulfilled its end of the bargain, you can easily dispute the transaction using your credit card. This isn’t as easy to do using a debit card. And, during the dispute, your money is missing from your account (see #1 above).

    3. Rewards. Credit cards offer all sorts of rewards simply for buying stuff, whether you are subject to finance charges or not. Some of the best credit cards offer 2-5% cash back on every purchase. This is like saving 2-5% on EVERYTHING you buy. Debit card rewards are not typically as good, and with cash this isn’t an option at all (unless you are a good haggler, which takes extra time and effort on your part, for each and every transaction). If you carry several cards and use each card for the spending category which offers the best rebate, you can save a lot of money from the rewards. Of course, this only works if you stay within your budget and limit your spending to the stuff you were going to buy anyway.

    It’s not hard to save credit card receipts and then enter the transactions into your checkbook register as if it was an immediate debit card transaction. This can keep you from overspending your checking account balance. More sophisticated spenders can reconcile their spending using a spreadsheet or a personal finance application.

    I personally use my credit cards for as much as I possibly can. I can’t remember the last time I went to an ATM. Even if I have the cash to buy something, I put it on the card for the reasons listed above. I would even pay my monthly mortgage bill by credit card if my lender allowed it. Like so many other things in life, credit card use requires knowledge and discipline to be beneficial. Improper use gets a lot of people into big trouble.

    Having said all of this, I think credit card companies themselves are pure evil, because they try to take advantage of their customers with finance charges, fees, confusing agreements that can change with little notice, and so forth. Read their disclosures carefully and you’ll stay out of trouble.

  4. Funny about Money on April 7th, 2008 7:14 am

    I’m with The Executioner on the advantages of credit cards. That said, your observation on the insecurity of the billing system is right on. I don’t do well with on-line billing, because I forget to go to the website and look it up. Because I wait until snail-mail delivers a paper bill, all it would take is one error somewhere along the line to mess up my careful plan to pay the balance in full, on time.

    In addition to all the plusses T.E. mentions, AMEX makes it possible for me to survive my employer’s hideous new biweekly payroll system. This month, for example, my second paycheck won’t arrive until after all the automatic withdrawals for ALL my regular recurring bills (utilities, insurance, mortgage, etc.) take place. This means that between the 20th and the 25th, I will have no money, zero, zip. If I didn’t have an emergency cushion in the checking account, it would be $200 overdrawn just by the ordinary cost of running my home during a time of year when neither the air conditioning nor the heat is used.

    But thanks to the credit card, I can at least eat.

  5. Pay Afternoon Debts Live on April 9th, 2009 8:28 pm

    Ten tried and true suggestions that can be made to change spending habits that will help free up the money necessary to pay down debt, reduce stress, and begin living a debt free life.

  6. Dume on June 4th, 2009 7:38 pm

    That was a great post…I love this site…Thanks

  7. Chinese Porcelain on November 11th, 2009 4:18 am

    The complete credit system is the guarantee for the credit card.

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  9. Porcelain on November 11th, 2009 4:25 am

    In China, 60% people use cash instead of CC.

  10. artificial grass on November 23rd, 2009 2:03 am

    I agree with the comments above from “porcelain”.

  11. synthetic grass on November 23rd, 2009 2:04 am

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  12. china porcelain on November 25th, 2009 2:18 am

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