Why Credit Cards Are Dangerous
I was asked via the comments on this post if I was opposed to credit cards that were paid off in full the next month. The commenter in particular uses it like a debit card and earns rewards. I've wrestled with this a lot over the years, and I thought it was time to explore why credit cards are dangerous.
It's a Personal Decision
We don't have a credit card. I think we were two weeks into Financial Peace University when we paid off our credit cards and canceled them. I think we had two of them, but were really only using one of them for the rewards. We racked up the bill every month (we were not on a budget) and then paid it off. We never paid a dime in interest.
Every few months or so we could cash in the rewards for a gift card of sorts. We would get so excited about a $20 Applebee's gift card after spending thousands of dollars in the previous months. Once we decided we were going to pay off all our debts, we knew the credit cards had to go.
Since then the credit card discussion has come up a few times between Kelsey and I, and also with others who wonder where we stand. So, I thought I'd write my thoughts and opinions here.
You Don't Need a Credit Card
Let's just start here. You don't need a credit card. If building your credit is what you are worried about, I'd love to ask why. A credit score measures how well you manage your debt. Maybe you have student loans or have had a credit card for a while. If you've been making payments on time, it's likely you already have a good credit score.
We haven't had a credit card in nearly four years, and last time I checked our credit score, it was still really good. Besides, we already have a mortgage and don't plan on borrowing money ever again, so this number doesn't mean a whole heck of a lot to us. I've only had one instance of needing a credit card and that was for renting a car from Enterprise at the Des Moines airport (a stupid policy I must say). I simply took my business to Budget, who only required a debit card.
Overspending
If you don't have a budget and are using a credit card for all of your purchases, you're likely spending more than you would if you were on a budget and only using a debit card. I know, because we used to operate in the former, and as soon as we started budgeting, we stopped a lot of our extra spending. Basically, if it wasn't on the budget we didn't have money for it, and we didn't spend it.
In retrospect, I think Kelsey and I are both rule followers. So as soon as we set up some rules around our spending and a monthly budget, it became easy for us to follow. We knew if we followed the rules we would win. Of course we bent the rules from time to time, but the principle of setting up boundaries kept us headed down the right path.
Always a Month Behind
When we used a credit card to pay for everything on a monthly basis and then pay it off at the end of the month, we were essentially a month behind on our budget. We were spending the current month's income on last month's expenses. So, say you lost your job, or all of your income. You have already racked up one month of expenses on the credit card. You then have to pay that the following month (without income). So, you’re likely dipping into savings at that point. Just something to think about.
We now follow one of YNAB's rules of spending this month's income next month. If you are in a financial position to do so, you should try it. It's a sure-fire way to end the paycheck-to-paycheck cycle. Kelsey and I each get paid every other week, but we simply budget on a straight calendar month now.
Earning Interest Is Better
Regardless of what a credit card company promises in rewards, you're likely spending more to get that reward. Whether that's a behavior or simply the dangling carrot in front of your face, you are probably playing into their games. When we were in the thick of it, spending all of our money on credit, it was so easy to think about everything in terms of payments.
We put a king-size bed on credit because we could squeeze the small payment into our imaginary budget. But now, being on the other side of debt, it's awesome to see interest working in our favor. With a six-month emergency fund sitting in our bank account, we're earning 3.01% back. It's freaking awesome! We're likely going to make $400 in interest this year because of the savings we've accumulated.
I still think this is a personal choice, but if you are making minimum payments and racking up the interest every month, I would suggest cutting up your cards and quitting cold turkey.
If you pay off your balance every month and like the rewards, I would suggest thinking through your spending for a month to see where you might be overspending due to 'perks' or rewards. I'm already thinking through this personally. We're planning on finishing our basement and it would be really nice to save 5% or whatever is offered to open a Lowe's card, especially on the big purchases we will be making. Seems wasteful not to get the discount. But, I am already tempted to just spend frivolously in that scenario (I know myself pretty well).
How do you feel about credit cards?