Welcome to the 7th Smart Money Debate at ReadyForZero! To see the other side of this debate, read the opposing viewpoint: Why You Should Use Credit Cards (Not Cash). And then let us know which argument was more convincing!
This post was written by Kurt Fischer, owner/blogger at Money Counselor, a site for helping you get out of debt, build wealth, and retire comfortably. You can find him on Twitter @KurtFischer57.
Credit Card Quiz
Here’s a one-question quiz: Why were credit cards invented?
- As an altruistic act to make consumers’ lives more convenient.
- To protect consumers from being robbed of cash.
- To provide employment for legions of undecipherable-fine-print-writing attorneys (see your credit card agreement)
- To generate profits for credit card issuers.
If you guessed (d) To generate profits for credit card issuers, give yourself a gold star! And now class, how do credit card issuers generate profits? Merchants who accept credit cards pay fees, but mostly card issuers make money by transferring cash—in the form of interest and fees—from your pocket to their pockets. Issuing credit cards is a highly lucrative business, which means loads of money is being siphoned from consumers’ pockets for the privilege of readily going into debt.
“Yeah, but I always pay my balance off every month, so I never pay any interest or fees,” you say. Okay. I do the same. (We’re what credit card company execs refer to as “deadbeats.”) And, so far, nothing’s gone wrong. You and I have always had the cash to pay the balance, and we’ve never succumbed to temptation to finance a big purchase on our credit card instead of saving the cash to pay for it. But for thousands of cardholders with the same intent, something does go wrong, and suddenly they find they’ve borrowed money at 18% or more interest. And if they miss a payment, their credit rating begins crumbling, which has lots of other ugly consequences that also cost money.
What’s the Moral?
DEBT = RISK
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It’s as simple as that. If you have debts—even credit card debt you plan to pay off each month—you’ve taken on risk. What’s your Plan B for making payments on your credit card debt if your family’s income unexpectedly drops or you’re hit by a big, unexpected expense or some other crisis?
Credit Cards Are Convenient!
Let’s dissect everyone’s favorite reason for using a credit card instead of cash: “It’s so convenient!” Debit cards are just as convenient as credit cards and are accepted most everywhere credit cards are accepted. So be honest: When you say you use a credit card instead of cash because “it’s so convenient,” might you really be saying the card lets you spend money you don’t have right now? If you answer “no,” then what’s your reason for using a credit card when a debit card is perfectly acceptable to the merchant? Oh yeah: Those irresistible rewards.
But I Love the Rewards!
I like rewards too. I earn cash back when I use my credit card. But understand: If reward programs were net financial losers for credit card companies, there wouldn’t be reward programs. Overall, reward programs cause more cash to be transferred from consumers’ pockets to credit card issuers’ pockets. That’s because rewards entice people to open credit card accounts and to use credit cards. Once that mission’s been accomplished, for many cardholders it’s only a matter of time before the card issuer is earning more money off of them than it’s spending on rewards. And card issuers know it. Maybe you’re convinced you’ll come out ahead, and maybe you will. Remember though: The future is notoriously challenging to predict.
The Virtues of Using Cash
Why is relying on cash better than routinely using a credit card?
- You’ll never be charged interest on the amount of a purchase you made with cash.
- If you use currency, you don’t have to remember that pesky PIN!
- You don’t have to feel vaguely uneasy when you immediately recycle a credit card agreement.
- You’ll never spend more than the balance in your bank account.
- When you run out of cash, you’ll know it’s time to stop spending!
- You’ll never risk hurting your credit rating by missing a credit card payment.
- It’s fun to look at all the details on currency! And have you ever played Liar’s Poker?
- You’ll be less likely to get acquainted with a local bankruptcy court judge.
- You’ll be less likely to learn just how abusive and nasty debt collectors can be.
- The less you use your credit card, the less likely you’ll be the victim of ID theft or credit card fraud.
- You’ll be poking your finger in Capital One’s (or the equivalent) corporate eye!
Some of My Best Friends Use Credit Cards
Hey, I’m not a fascist about this stuff. I have one credit card with a $5,000 limit. I’ve found it’s necessary for certain transactions, and it’s useful for travel. Unless you have a history of overspending and running up credit card balances, I’m not opposed to credit cards. But I recommend mainly using cash (including currency or a debit card) and keeping that credit card safely sheathed in your pocketbook most of the time. And keep the limit low! When your credit card issuer sends that congratulatory, ego-stroking letter announcing your new, higher credit limit because of your outstanding citizenship record, call and politely decline. It’s a trap, right?
In fact, isn’t the essence of the credit card issuers’ business model trapping you into debt you’ll find challenging to pay off?
To see the other side of this debate, read the opposing viewpoint: Why You Should Use Credit Cards (Not Cash). And then let us know which argument was more convincing!
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