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The Credit Card Question – Employ or Eschew?
If you’ve read many personal finance blogs (say, more than two), you’ve no doubt seen very different philosophies out there regarding the use of credit cards. Some say that credit cards are no big deal – they are just a tool to be used. Others might say that if you were smart, you would put everything on a card for the rewards. On the other end of the spectrum, you have people like Dave Ramsey who say that you should not even have a credit card. So, I’ve decided to weigh in on the situation.
Borrow From None, eh? Aren’t you one of those "credit cards are evil" guys?
Well, no. Remember that, as stated in my About page, "Borrow From None" does not refer to a rule that I live by. Rather, it is a reference to the blessings that God bestows. Blessings that make it unnecessary to have to borrow from anyone else. It is not a mantra about how credit cards are evil or anything like that. To be transparent, I do have some credit cards (ok, a lot of them – but mainly because I don’t know what closing them will do to my credit score) and use one regularly.
The pros and cons of credit cards
The cons are easy:
- Interest rates can be very high
- Card lenders can increase your rates seemingly at a whim
- Credit cards are too easy to use and lose track of your spending which can lead to big trouble by the end of the billing cycle.
But to be fair, you could also argue that there are some pros to using credit cards for certain purchases:
- Convenience (going into the gas station to pay is such a pain!)
- Rewards
- Buyer protection (buyer protection, rental car insurance, extended warranties, etc)
Now the reality…
Sure, convenience and rewards are good, but you have to take an honest look at the entire picture. If you are carrying a balance, stop right there and forget about any rewards. You are wasting more money in interest charges than you could hope to receive back.
But what if I don’t carry a balance? Even then you have to be careful. I’m sure we’ve all read the statistics that you pay more when you use a credit card compared to when you use cash. I don’t have specific references but I’ve seen different sources that quote anywhere from 10% to 30% more. So, even on the low end, if you really do spend an extra 10% on each shopping trip, that 2% you get back is not looking so hot anymore. I honestly don’t know if I do this or not, but you certainly have to be aware of it. If you are falling into these traps and spending more money than you normal would, you are losing money each time you use the card instead of earning rewards.
How I use my credit cards
As I stated above, I do have a rewards card (well, 3 to be exact) (well, i actually have a bunch but I only ever use these three and use only one of them the vast majority of the time).
I do pay off my full balance every month but I can’t really tell if spend more because of using the card. We use credit cards for the necessities like gas & groceries. We recently starting using cash for "fun money" and discretionary purchases like going out to eat and other "extras." Since I pay it off every month, I honestly do not even know the interest rates on the cards I use; I only care about the cash-back I receive.
Recommendation: be careful
I am obviously not as vigilant about credit cards as Dave Ramsey. I would say that if you carry a balance, you need to stop doing that. Pay it off ASAP and put nothing more on it that you don’t have the money to pay off. And if you have ever gotten yourself into real trouble by running up credit card debt, then to you I would say do not even use a credit card (ever).
Obviously, most people use cards (as do I) for convenience. If you decide to use a credit card, you should get one that provides good rewards or has a low interest rate. Don’t just sign up for whatever one was handed to you on your first day of college or the latest one to come in the mail. Like anything else, you might as well be an informed consumer and search for the card that best fits your lifestyle and credit rating (whether you have excellent credit, poor credit, or Fair Credit ).
Credit card companies make lots of money
Keep in mind that you are not outsmarting the credit card companies by taking their 2% cash reward. They have really big buildings and lots of employees and they are in the business of making money (and they seem to make lots and lots of it each year). Keep that in mind if/when you decide to use a credit card.
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5 Responses to “The Credit Card Question – Employ or Eschew?”
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My wife and I eschew credit cards and have for 2+ years. Not that they are evil but they are an expensive tool.
Even if you pay your balance off and never incur a fee you still pay for your short term borrowing.
Go interview a local business and ask about their merchant service fees for visa/mastercard.
The credit card companies aren’t making money by tricking customers. They make their money from the merchants who pay for your short term borrowing. The merchants then increase the price of goods/service and ALL customers pay.
@GHolmes – that is a good point. I bet that a huge company like Wal-Mart can negotiate a pretty low fee, but I would guess that the fees are not insignificant for a small business.
@John
Yes Wal-mart uses volume to keep costs low but banks still make money with their relationship with big box stores. Banks dont need us small time merchants to carry the Wal-marts of this world.
As consumers of short term borrowing you have to figure out how much it costs. Nothing is free.
My $.02, if you look only to your credit card statement you are being extremely short sited.
If you use your card as a debit card, they don’t have the same fee (called an “discount rate”) that a credit card does.
Unfortunately, though, as our world turns more and more to plastic ( what’s in YOUR wallet ), greater volumes of transactions will be processed.
It took me a while browsing through your blog and I liked this post particularly, I just subscribed to your rss.
the only way to survive now is to pay in cash or not to buy if there is no cash!