One thing that constantly amazes me is the frequency with which people argue with my advice of avoiding credit cards altogether. Sometimes it is the argument of “rewards” offered or cash back on purchases. Sometimes it is the “I only use it for emergencies” claim or the “I don’t ever use it, but I keep it…just in case” discussion. No matter how they push back, I get an astounding amount of resistance when I tell someone to stay away from credit cards. So I thought I’d put forth my reasons for developing this opinion and open it up for some additional discussion or debate.
It is not uncommon for someone to passionately defend their use of the little 2-1/8” x 3-3/8” piece of plastic in their wallet and sing its praises on high. Why? I believe the credit card represents what is “normal” in America. A credit card represents buying power. A credit card can earn rewards/points with purchases. But here’s the catch: a credit card gives you the power to go buy something you can’t pay for. While everybody may have a credit card (or several), there are lots of things everybody else seems to be doing that may not be a good idea for you. Think about it. The average American lives paycheck to paycheck. The average American isn’t saving for retirement. The average American is DEEP in debt. None of those things sound like good things, but everybody is doing it. Let’s get into some of the specific issues I have with the use of a credit card:
- You will spend more. There are lots of studies out there that show you’re not emotionally tied to spending when you swipe a piece of plastic. It doesn’t ‘hurt’ when the cashier gives you a total and you hand him a credit card. On the other hand, when you have to count out those greenbacks, your body recognizes this as a cost to you and it makes it harder to fork over those beautiful pieces of paper. Most research has concluded that you will spend 15% more on average if you use plastic than if you use cash.
- You are assuming you can eventually pay for it. While things in life are usually perfectly fine, our recent economy has proven things don’t always go like you think they will. When you use your credit card, you’re making the assumption that you are going to be able to actually pay the bill. Since the average American lives paycheck to paycheck, this means you’re spending money you don’t have and thus are assuming you will have money to pay it when the bill arrives. This also assumes you will keep your job, that there won’t be an issue at the bank, and that something of greater importance won’t demand your financial attention first. Life happens and credit cards add an automatic element of risk to your situation.
- Additional discipline is required to pay it off (monthly or over time). Assuming everything goes great and you don’t have a financial meltdown during the period between your credit card purchase and the date on which the bill arrives, you still have to keep in mind that bill is coming. When you use cash, you know the money is spent because you don’t have it anymore! When you use a credit card, you have to consider that the balance in your checking account or the money coming in next week’s paycheck is already spent and not over-extend your money. THIS HAPPENS ALL THE TIME.
- “Rewards” are often expensive or never used. The most common set of arguments I get when talking with nerds like myself is the “I get airline miles” or “I get cash back on my purchases.” Let me be very clear when I say that there are promotional offers for credit cards that are very appealing and IF you take full advantage of them while still paying off your card every single month there is benefit to be had. BUT (and it is a huge BUT…ha ha) you must get it absolutely, perfectly right and have the extra discipline to play by their rules or you’ll get bitten.
I liken credit cards to a coiled up rattle snake. There are people everywhere that handle snakes with caution and never get bitten. Then there are others who are killed because they were either careless or the snake decided it didn’t want to behave. No matter why you believe having a credit card is a good idea, I don’t think you’ll convince me the merits outweigh the risks. I’ve been there; I’ve worked in the industry and know the rules change all the time. I’ve also consoled countless families who were “bitten” by their credit cards and it nearly killed them.