Are credit cards evil?
As I have spent time in the financial services and banking industries, and now in the personal finance blogging community, I have come across a lot of different opinions regarding credit cards. Some people absolutely love them while others equate them with selling your soul. As I have thought about my own experience with credit cards as well as the experience of those I’ve worked with. I’ve come to the conclusion that credit cards are simply a financial tool that is not suited for everyone. From what I have experienced and seen other people experience, I would not recommend anyone have a credit card unless they live on a budget and pay off their balances in full each month. There are some, however, who feel that credit card usage in general is bad. Here are a couple of the arguments I have heard.
Responsible use of a credit card does not exist. This is something I heard once while listening to the Dave Ramsey Show. While I respect Dave Ramsey for a lot of good he has done to inspire people to change their lives, he subscribes his followers to many absolutes that I feel are too general. For example, I have owned a credit card for 6 years and have never paid interest on my everyday purchases. There have also been times where we have been struggling financially and being able to time the due dates on our cards has kept us from negative balances and overdraft charges on our checking account. While I don’t recommend this practice for everyone, for those who are responsible with their spending and are living on a budget, there is such thing as responsible credit card usage.
The benefits of a credit card do not outweigh the costs. This argument is neutralized simply by recommending that no one use a credit card unless they have a plan to pay off the balance each month. When this is the case, there are no costs of using a credit card. However, the benefits can be great. A few years ago, I used a card where I was able to use the miles I had accumulated for a round trip ticket to Dallas to visit my wife’s family before we were married. And with the card we use now, we have received almost $1,000 in gift cards in the past three years that we have used for date nights and gifts. In our situation, the benefits far outweigh the costs simply because we haven’t seen any costs — only benefits.
If you are still wondering whether or not you should make the jump into credit cards, here are some other tips on how to use them responsibly.
Don’t use your credit card as an emergency safety net. I’ve met several people who do this rather than keeping a cash emergency fund. This is a bigmistake. The fact of the matter is that accidents and emergencies happen, and if you aren’t in a position where you could pay that card off quickly, you may get stuck paying for it over a long time.
Avoid maxing your card out every month, even if you are paying it off in full. When it comes to your credit score, how much your balance is as a percentage of what your limit is will have a huge impact. A generally recommended utilization ratio is 30 percent. If you can stay responsible, you may consider asking for an increased credit limit, but it may be better to simply limit your usage of the card to stay safe.
Do your research before applying for a card. There are several websites out there where you can search different credit cards to find one that fits you best. Weigh the positives against the negatives. Stay away from high interest rates, even if you’re not planning on paying any interest. Decide which rewards style you like best (cash back, sky miles, etc.). Make sure you check to see if there is an annual fee. Some cards will waive it for the first year to lure you in, but will start charging it annually after that. Take the time to research and decide what works best for you.
In conclusion, as I mentioned at the beginning, I do not recommend credit cards for people who struggle to control their spending and are not currently on a budget. Without a budget in place, spending can quickly get out of control. Having a credit card can accelerate that. However, if you are a responsible spender, a credit card is far from a poor financial tool since you can benefit from the rewards and a boosted credit score.