Last week’s FPU lesson was “Dumping Debt,” which was rather different from what I expected. Dave spent a lot of time talking about the disadvantages of various kinds of debt and not as much as I thought he would on the mechanics of the debt snowball. Of course, credit cards were pointed out as a particular evil, not just in the video but also reinforced by the class exercises. One exercise was to stand up and explain to the class either how your life works fine without credit cards or why using credit cards is vital to your life (I think that question was asked with some sarcasm). The second exercise was to volunteer to cut up your credit cards.
You all know, of course, that Kyle and I use credit cards in what would be considered a responsible manner by anyone who is not a fanatic. I know that the students in the FPU class are there to get Dave’s teachings, which we definitely give them, but I also don’t feel comfortable lying about or concealing my own financial habits. How we handle our money does come up from time to time in the discussions. Our course leader also uses credit cards – paying them off every month – which he was open about during the class.
It was very interesting to me to talk with the course leader and other table hosts about their credit card habits. Some of them don’t use credit cards at all and really question why anyone would – I suppose to them even responsible use seems to be asking for trouble. Others of us use credit cards but pay them off every month (and in our case, we use them exactly like debit cards) and don’t see any issue with that. As a credit card user, it felt pretty strange to me to be defending their use. Like, I’m on the “pro-credit cards team” or something! I don’t want to be pro-credit cards because I don’t think that everyone should use them, I just think that people who do use them well shouldn’t have to be on the defensive.
Several people in our class stated that they do not use credit cards and their lives run fine. The people who stood up to say why they do use credit cards – brave souls, in that context! – made what I thought were very good points. One person had experienced a fraudster cleaning out her checking account back when she was using her debit card, and the hassle and time it took to get her money refunded by her bank has caused her to switch exclusively to using credit cards for their greater protections. I think this is a very legitimate reason to be using credit over debit. Dave also talks in his Dumping Debt lesson and frequently on his radio show about how having a credit score is not essential to life and all a good credit score means is that you have paid the banks lots of interest. I am very skeptical of this opinion, though of course not having lived without a credit score I can’t say for sure that my life wouldn’t function. However, as a renter and future mortgage-holder my credit is frequently checked, and I know many employers check as well. Dave can rant and criticize them all he wants but it won’t change their practices, and while you may be able to find someone to rent to you without a credit score it’s likely that your options will be limited. In addition to those advantages, there is also the whole rewards system, which is a nice perk.
But I don’t want to go overboard on the pro-credit card side of things. If you want to behave badly or be careless with your money, credit cards can amplify the trouble that you get yourself into. Personally, I was afraid of using credit cards when I signed up for my first one (which was “for emergencies” that thankfully never happened) so I used debit almost exclusively for the first three years of my financially independent life. I didn’t trust myself to not go into debt so I only used the credit card for an occasional purchase to show some activity (and always paid the balance off by the due date). Through that experience, I learned to trust my money management skills, and when Kyle and I got married I switched to using credit cards whenever possible.
You have to be really sure to not get carried away with the advantages of credit cards. People who push credit cards as part of their livelihood may get a bit over-zealous as well. One of the myths out there is that it’s advantageous to carry credit card debt to increase your credit score, while in fact the larger the difference between your balance and your credit limit the better for your score. Basically, credit score-wise it’s best to have lots of available credit that you don’t use. It is also my opinion that you should not use credit cards to enable you to live beyond your means, for instance by financing a large purchase at 0% for a year and trying to pay it off in installments, or by purchasing something that you can’t pay for until after your next paycheck comes in, even though you would not be incurring fees or interest if you execute those strategies perfectly. And you certainly shouldn’t spend more than you normally would just to rack up more rewards!
Even chasing rewards may turn into more hassle than it’s worth – it all depends on how organized you are, how predictable your spending is, and how many cards you can keep in rotation. Kyle and I generally prefer cash back rewards cards to travel rewards cards because of the ease of redemption, even if the travel cards could ultimately provide more rewards. If you are churning cards for sign-up bonuses, you have to be very careful to meet the minimum spend requirements and to cancel the card when it is no longer useful to you (if there is an annual fee). If you keep cards for long-term rewards or perk potential, you need to periodically re-evaluate if the offered rewards still match you spending habits (and that they haven’t changed).
My conclusion is that the use of credit cards is a personal choice. I certainly don’t think everyone has to have one, and I think that people who use credit cards responsibly should not have to feel defensive about the practice (even in FPU!). We should help educate people who use credit cards irresponsibly as to why they are so damaging and how beneficial it would be for their finances to stop using them. Those are the people who really need to be preached to, not those of us who use credit cards exactly like debit and don’t even spend more than when we use cash.
Have you ever felt defensive about your choice to use credit cards? If you don’t use credit cards, do you think that no one should? How do you keep yourself from getting carried away with the perks of credit cards?
photo from Free Digital Photos