I came across Dave Ramsey’s The Truth About Credit Card Debt tonight while trying to decide what to write about, and if Dave Ramsey is your personal finance prophet and his Southern drawl soothes your soul, don’t hate me because of this post. I think he does a lot of good for a lot of people that are at level 0 when it comes to personal finance. Reading his Total Money Makeover was my first foray into personal finance and inspired me to start budgeting, which in turn inspired me to get to the path I’m on now. But there are a lot of generalizations that I find don’t apply to everyone.
Exhibit A: “Responsible use of a credit card does not exist.”
I’ve owned a credit card for 6 years now and maybe it’s just because I have this internal burning hatred for spending money, but I’ve never felt like having a credit card has made me spend more than by using a debit card or cash. And it’s definitely never been a problem since I started budgeting, because it’s my budget that determines my spending, not my credit card. I’ve never paid interest and I’ve never paid a late fee. Here’s what I have gotten from using credit cards:
- American Express SkyMiles: Round-trip ticket from Salt Lake City to Dallas shortly before we got married and I was a little strapped for cash.
- Capital One Signature: $780 in gift cards, mostly for groceries or date nights and around $80 in donations to the American Red Cross.
- Chase Amazon: This one we’ve only gotten about $30 in Amazon credit, but we only use it when we shop on Amazon, which isn’t that often.
Exhibit B: “You do not build wealth with credit cards.”
I don’t know of anyone who has ever argued against this statement, so to me it sounds a little pointless. It’s true that credit card companies want your money, and it’s true that they created the rewards programs to entice you to use their cards, and you’re definitely not going to get rich off of rewards points. But it’s free money, so why turn it down? It was also nice when I was out of the country for a month and a half and I could use my credit card without a fee rather than pulling cash out of an ATM and paying a fee each time.
Exhibit C: “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!”
Of course it’s not. But this is assuming that someone who has good enough credit to get a card with over a $80,000 credit limit doesn’t have the cash to back it up and can’t qualify for a loan through their bank. If you’re going to put $80,000 on a credit card for a car and don’t plan on paying it off immediately, we need to have a serious talk, because generally auto loan rates through your bank are around a third of your credit card rate. I don’t recommend buying a brand new car anyway, because whether you pay for it with a card or with cash, it’ going to lose a lot of value when you drive it off the lot. So it’s not worth it either way. But if I can pay cash for an $80,000 car and get rewards for all that one my card, you better believe I’m on that like white on rice on a paper plate in a snowstorm.
So basically, if you’re capable of creating and sticking to a budget and are dedicated to paying it off each month, I see it only as a good thing. Free rewards and the convenience of not having to drive to a bank or an ATM every time you want to do anything is really nice. If, however, you feel like you mix as well with credit cards as Taylor Swift does with boyfriends, you may need to wait a while. Here are a few more credit card tips to round things up.
Stay out of the minimum payment trap. If you do have credit card debt, don’t you fret (that rhymed. Unintentional). Even though I’m a little more than passionate about the subject, I’m not going to judge you. But I do beg you to stay away from the minimum payment trap. Those credit card companies aren’t doing you a favor by keeping the minimum payment low. That’s exactly where they want you (yes, they’re slimeballs, and that’s why we like to pay it off every month, to stick it to them). You paying the minimum payment each month maximizes the interest you pay. So do whatever you need to short of selling your body organs or your children to do more.
Don’t use your card as a safety net. You should be building up an emergency fund for that. Get to at least $1,000 before you start thinking about any other financial goals. If you’re stretched beyond that, do whatever you can to avoid using your card unless it’s just a few hundred dollars and you know you’ll be able to pay it off before it’s due. If you do have to use it, call first and ask if they can lower your interest rate. I was afraid a few months ago that we would need to, so I called and got our rate cut in half for the next 6 months. Luckily we ended up not having to use it, but it made me feel a lot better.
Avoid maxing out your card each month. When it comes to your credit score, credit utilization is a big chunk of how they determine your creditworthiness. If they see you maxing out your card each month, they may see you as a bigger risk. So if you’re good with your card, consider asking for a higher limit so you can decrease the utilization percentage. If you don’t think that would be a good idea for you, don’t do it and just try to keep your utilization low.
Think before you jump on an offer. Take the time to really think out a credit card offer. Research consumer reviews. Compare it to other cards. I used CreditCards.com to get my last one. Weigh the positives against the negatives. Decide what rewards style you like best (cash back vs. sky miles vs. points). Make sure to see if there is an annual fee after the first year. Those ones are tricksy. Just take the time to think things through before jumping on whatever you get in the mail.