The following is a guest post from Mike, the author behind Personal Finance Beat, a blog that covers and links to a host of personal finance and money management topics. You can follow him on Twitter at @PFBeat.
I Use a Credit Card
I use a credit card to pay for almost everything I buy. If my landlord would allow it, I would even pay my rent with a credit card. I take out $200 a month in cash just in case I need it, but everything else goes on my American Express Blue Cash card (note: not an affiliate link). Using a credit card helps to keep me organized, it’s safer than using cash or a debit card, and it offers cash back rewards that is essentially free money in your pocket.
These benefits, of course, are contingent upon one crucial thing: you must pay off your balance — in full — every month. If you can’t be disciplined enough to pay off your balance in full every month, then you probably shouldn’t have a credit card. But this is a system that works for me. Obviously, not everyone agrees with this approach.
Dave Ramsey’s View
Take Dave Ramsey, for example. Dave offers a lot of great personal finance advice, but I could not possibly disagree with him more when it comes to using credit cards:
Myth: Aren’t there positive uses of a credit card? Like rebates and airline miles?
Truth: Responsible use of a credit card does not exist. Credit card debt is a major problem in America.
There is no positive side to credit card use. You will spend more if you use credit cards. Even by paying the bills on time, you are not beating the system! [...] Personal finance is 80% behavior. You need to cut out habits that make you spend more. You do not build wealth with credit cards. Use common sense. 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.
Where We Differ
Let’s take a look at some of Dave’s argument and see where we differ: Responsible use of a credit card does not exist.
This is ridiculous and only true of people that are irresponsible with their money and spending. If you cannot control your spending, then of course having a credit card is a bad idea, because it makes it a lot easier to go into debt. No argument there.
But the problem in those instances lies with their overspending, not the credit card itself. For people that are responsible with their money, a credit card simply acts as an effective tool for managing their money. You can be responsible using a credit card if you know what you’re spending your money on and why you’re spending it. I do it every day.
There is no positive side to credit card use.
More nonsense. As I explained above, the benefits I see for using a credit card are threefold:
I keep a budget and track my spending every month using Mint. There, my transactions are automatically uploaded and categorized for me every time I make a purchase using my card. I know, for example, that I spent exactly $212 on groceries last month. That’s because when I go grocery shopping, I pay for my items with my credit card, and by the time I get home, that transaction has already populated for me in Mint, automatically.
And the same goes for nearly every single thing I buy. Swipe my card, and the transaction magically uploads to Mint, where I can sort and review what I’m spending my money on. Now, theoretically, you can manually enter transactions into Mint for cash purchases. And I do this myself when I have to pay for something in cash, but it’s only a handful of times per month. Can you imagine having to manually input the data for every single purchase you make if you’re paying in all cash? Chances are, you’d never do it. And if you’re not tracking spending, how can you know where your money is going and what areas you could cut back on?
This is more of a credit card vs. debit card discussion, but it applies to cash as well. Debit cards offer less protection than credit cards (and cash essentially offers zero protection if you were to lose your money). If someone steals my debit card and withdraws money from my checking I account, I may get all of that back (depending on my protection limit), but in the meantime, that is actual, real money that I no longer have access to. My checking account will have less money in it.
On the other hand, if someone steals my credit card and charges a bunch of things to it, not only is my protection limit higher, but no actual money has been withdrawn from any of my accounts. They haven’t stolen my money; they’ve stolen the credit card company’s money. And if your wallet is stolen and you have $200 cash in it, what protection do you have for recovering that money? You have none, because you are paying for everything in cash.
I know some people who are pretty fanatical about their rewards and the benefits they offer, but this is more of a secondary feature for me in the sense that it’s nice to have, but not something that would make me choose one credit card over another. (I understand that some people would disagree.) I have the “cash back” rewards for my Amex card, and last year this netted me about $525 total – that’s real, American greenbacks — definitely a nice perk to cash in at the end of the year.
Now, getting back to Dave’s argument:
Personal finance is 80% behavior. You need to cut out habits that make you spend more.
This I actually agree with. And like I said, if your spending behavior is destructive, then you shouldn’t have a credit card. But people can change their behavior. People are capable of growing and getting better and learning how to spend their money responsibly. And when you get to that point, when you’re responsible and when you’re an adult, there’s really no reason you shouldn’t use a credit card.
You cannot beat the credit card companies.
Well, I am living proof that you can. Not only did I not pay a dime toward interest or fees last year to American Express, but they paid me $525 for the privilege of using their card, while also offering me the benefit of keeping my budget organized, and providing fraud protection that simply does not exist by paying for everything in cash.
Bottom line: Whether or not you think a credit card is right for you is only a decision that you can make. My personal belief, however, is that if you’re responsible with your money, then the benefits of having a card far outweigh the risks.
Crystal’s Comments: Mr. BFS and I are fans of our credit cards too. We use a PenFed Visa for gasoline and a Discover More card for everything else that we can possibly charge. I’ve been doing this since 2001, carry my balance off in full every month, and earn 1-5% cash back on nearly everything. As long as you don’t spend more than you would any other way, I don’t see credit cards as a problem at all. They should be avoided like the plague if you feel more spendy with them than without them though.