I am on the fence a bit with credit cards. The truth is that they can make life more convenient and do have some perks (though they are rumored to be ending), but because some people aren’t trained / disciplined enough they can hurt a lot more than they help.
Personally, I have been on both sides of the fence. I, like many kids, got one and maxxed it out, not really understanding the consequences. After going through a few rounds to testing myself with credit cards, I finally got to the point where I thought I could use them “wisely”.
How I used them to my advantage
So what I did was move all of my debt to 0% credit cards via balance transfers. I transferred 2 car loans, multiple credit card balances, and even a small high-interest student loan. We were very motivated to pay off our debts and wanted to amplify the process by having all of our debt at a 0% interest rate.
I should mention that at the time we were doing this 0% balance transfer offers were very easy to come by. And none of them had balance transfer fees attached to them. As I have helped people look for balance transfer offers recently, I noticed that it is almost impossible to find one without a balance transfer fee and 0% is hard to come by. Had we not had these benefits working in our favor, I think most (if not all) of the interest we saved would have been lost.
I don’t recommend doing what I did
Even if you could find a bunch of 0% balance transfer offers with no fees, I don’t recommend doing this. While we did pull it off, there are a lot of balls that need to be juggled for this to work. If you drop just one of the balls, just about all the benefit gained can be lost.
I created a very meticulous schedule of when each offer expired and I made sure to apply for a new card a month before each offer expired. At one point we had over 10 open credit cards – it was a very messy process that could have easily turned into a disaster if just one small detail was missed.
I normally recommend that people take the debt snowball approach to paying off debts. It is a whole lot safer, less time-consuming, and is the most motivating way to pay off your debts.
What we do now
At the time of this writing the only debt we have is a student loan. We have chosen to focus on saving for a down payment for our house rather than paying it off right now. We exclusively use debit cards and avoid credit card use, just so there is no chance that we would get caught up in the trap again. I personally feel that we are both disciplined enough to handle them, but to me I would rather eliminate any possibility of misuse by not using them at all.
We do still have two open credit cards that are technically for “emergencies”, but since we have a decent sized emergency fund, we probably don’t need them.
How do you use credit cards?
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We have one credit card…a BP card. We use it primarily for gas purchases and get a $50 gas card about every two months. Amazingly, this CC actually helps with our budget a little. We just make sure the balance is paid every month and that all purchases stay within our budget.
Our family has also gone back and forth on the whole Credit Card discussion. We have never had a late payment or any fees. However, after a Dave Ramsey event we tried going without credit cards just to see if we really spend less money. It lasted about a week. Then we moved overseas where there are not credit cards (yes such a place does exist in the world – PNG). Over the last three years I have become convinced that we spend less using cash than credit cards. I blogged about my observations in an article titled “Does spending cash really save money compared to credit cards.”
Bob–It really is one of those questions that depends mostly on the person and his ability to manange debt.
But apart from the mechanics of credit cards, for good or for evil, the big picture issue is that it creates the buy-now-pay-later attitude, and that tends to become a lifestyle. A lot of people are able to manage it effectively while fully employed and not facing any life crisis, but the problems hit when these problems hit, and by then it’s too late for a do-over.
Personally, I think they’re best used when absolutely necessary, such as when purchasing gasoline or airline tickets. Even for online purchases, it would be better for most people to get a PayPal account, which does what credit cards do but doesn’t require giving out financial information.
I think it is okay to have one or two for convenience or emergencies IF a person or couple is disciplined enough to pay them off monthly or soon after using one for an emergency.
Hubby and I are in the process of paying off quite a bit of credit card debt now because we used them a lot when I went back to college as a full-time student to finish my degree in 2004. It’s not fun, and I now wish we had done it differently. It will be such a good and freeing feeling to finally get them paid off!
We only use debit cards now, and this really hasn’t caused us any major inconvenience with online purchases, car rentals, etc…
I’ve read Dave Ramsey’s book, and overall I think the debt snowball and emergency fund is the best way to go.
In general I’m pretty anti credit card, and I don’t suggest using it as an emergency fund, or to pay for big purchases you don’t have the cash for. We do have one credit card, however, that we only use when we have the cash to pay off the purchase right away, which we do as soon as the purchase shows up in our account.
We figure we get a bit of extra money every year by doing this, we may as well get some money back from the CC company – in exchange for having their card, right? Of course we’re extremely disciplined about using them, and NEVER use them if we don’t have the money to pay them off right away.
If you are responsible with your credit card use there is nothing wrong with it. As long as you can pay the bill in full each month, I don’t see anything wrong with using it.
Credit card is indeed useful in times of cash insufficiency or if you want to buy something in installment basis. But the big overcharges and late fees are big headaches for card holders every time they neglect to pay their balances every month.
My wife and I have paid off our credit card each month now for about 20 years now. We use it mostly so we don’t need to carry around a lot of cash. We are slowly moving to using our debit card almost exclusively however. I would admit, I probably spend a bit more when I use a credit card then when I use a debit card and even less if I am using cash.
We use the credit card for almost all of our monthly expenses. What I like about it is that if it gets lost or stolen we are only responsible for the first $50.00 that someone else charges. Unless the laws have changed, someone could wipe out your checking account if the same thing happens with a debit card leaving you with very little recourse.
Do we spend a little more each month? We probably do but it gets paid off each month. We also get a small percentage back every quarter.
We are what the credit card companies call dead beats.
As for late fees and over charges, there is some sense of personal responsibility.
I’m in the no-credit-card-only-debit-cards camp. I don’t see any reason to change that either.
The only thing that tempts me is an Amazon.com Visa since I shop there so much I’m sure the points would add up quickly. However, I don’t have any plans of getting a credit card any time soon and probably won’t again.
I voted for “pay off the balance each month”. I use my card for the rewards and to not need to keep such a close eye on my chequing account every purchase.
Bob, great discussion topic.
If you listen to Crown Financial Ministries and Howard Dayton, you’ll hear it’s okay to have one credit card, if paid off each month. Dave Ramsey won’t go there. He leans heavily on the side of no credit cards because it’s like playing with fire in that you’ll eventually get burned (we’re all human and can fall into temptation).
Our family has one credit card. I think it does relate to your ability to manage wisely and whether or not you have a steward’s mindset. If someone continually has trouble paying it off each month or easily tempted with instant gratification, it’s probably not a good idea to have the card.
We use the card out of convenience and never unless we know we have the cash to pay it off immediately or in the next coming paycheck. Sure, the next paycheck may not come, you never know, and that’s why it’s not used for items outside our monthly budget.
I have two credit cards (one will be paid off by the end of next month) that have balances and about 3 others that don’t. After I get my cards paid off (hopefully by the end of 2010), I don’t plan on using them again. It is just too easy to put a “small” purchase on them that you plan to pay off at the end of the month. Then, when you get the bill, you find all of those small purchases added up to a larger bill then expected. As you said, a person who is very disciplined will probably not have this problem, but I don’t want to take the chance.
Quick question that is off topic a little:
After I get my cards paid off, is it better to keep them open with no balance, or just close them? I’ve heard that having a large gap between what you owe and what is available can help your credit rating, but I don’t know if that is true. Anyone know?
@Jennifer,
if you have had the credits a while, and are concerned about having a good credit score, I would probably keep them open. Having cards with a long history is helpful…
@Bob,
Nice blog. I really enjoyed reading many articles. Incidentally, I have the same approach you have in paying bills – 2 days a month (when I get paid -one after 1st and the second one after 15th) and tracks using a spreadsheet. btw, thanks for your article on having multiple accounts with ING Direct for different savings categories. I have been thinking for a while how good it might have been if banks provided the option for users to create sub-categories in their online account (linked to one checking account). Finally I created two checking accounts with the same bank and linked to each other. I transfer online a fixed amount of money to one account on my pay day. And my goal is to meet all normal monthly expenses using that fixed amount. And I can roll-over unused amount to the next month:-)
As part of New Year finance clean up, I made some changes on how I use my credit card. We charge all NON RECURRING items (gas, food, groceries, shopping, household items) on a single credit card. All recurring expenses (rent, car loan, utilities, cell etc.) get paid via Auto-Pay or Free AutoBill pay from my CHECKING account. For ALL non-recurring monthly expenses (normal expenses) I budgeted 800 dollars per month or 400 dollars per 15 days (for just me and my wife). The sole credit card we use for non-recurring expenses, I reset the balance to ZERO on 15th and 30th of every month (and I just try to be under $400 each time I make the payment). I do have subcategories for my budget; but I really care don’t as long as it is within 400. Had some early expenses for this month; so I have only $75 left till 15th. Probably I will not fill my gas tank full; but only enough till I can reach 15th
All these would not have happened, had I not got into debt! I still have credit card debts to pay off and as per my current schedule (fixed amount), God willing, I will pay off the cc debt and auto loan by end of next year.
Correction in my above post:
By NON RECURRING expenses, I meant FIXED expenses.
By RECURRING, I meant variable expenses
Sorry again got it wrong
Correction in my above post:
By NON RECURRING expenses, I meant VARIABLE expenses.
By RECURRING, I meant FIXED expenses