Friday, March 13, 2020

Are Credit Cards Evil?

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If you follow Dave Ramsey for any amount of time, you quickly learn that he's very against credit cards of any kind.  It's one of the things he meets the most resistance on, because people are very attached to their credit cards for a variety of reasons.  Are they really all bad?

What's Wrong With Credit Cards?

They don't hurt to use.  Dave always likes to say that personal finance is 80% behavior and only 20% head knowledge, and that studies have been done to prove that people feel the pain of spending more when they use cash instead of plastic.  Our brains understand trading - we hand over cash (or sometimes goods) and we get something in return.  But that cash doesn't come back.  When you use a credit card and get the card handed back to you, you don't feel like you've given anything away.  You actually feel like you got a deal, because you got back both the card and the item.

You spend more.  When you go to the grocery or stop at a fast food place, you spend more when you use plastic.  About 37% more in terms of fast food, but around 12-18% on everything else.  Credit card companies know this, and stores know this, which is why so many places make it easier to use a card instead of cash.  Cash is a hard line in the sand.  When it's gone, it's gone.  It's not the same with the card - you can add in a bunch of extra items and the card still goes through.  In fact, if you were to ask people leaving a restaurant what they just paid, only the people who paid cash will be likely to be able to tell you.  Memory is also activated by pain.

Banks are smarter than you.  Banks and credit card companies are out to make money, that's what they do.  They study all the ways they can make a profit off of you - they know your behavior better than you do.  Credit cards are the most aggressively marketed product.  New, financed cars are close behind.  Really, pay attention on the next commercial break on your TV show.

It'll catch up with you.  I like the rattlesnake analogy - it might not bite you every time you mess with it, but the more you poke at it, the more likely you are to get bit.  Why would you want to mess with a rattlesnake anyway?  Not a lot of upsides there.  78% of credit card users do not pay them off every month.

Spending doesn't build wealth.  At least, not the kind of spending you do on credit cards.  Because that's the number one argument for using credit cards, that you get rewards of some kind.  You only get rewards for spending and you have to spend a lot to get anything substantial.  You might argue that you only use credit cards on what you need and were going to buy anyway, but we already showed how that's a lie.  And even if you did pay for only groceries and gas on the card, maybe $400 or $500 a month and then paid it off right away, what's that in rewards?  $15 a month on the high end?

All of these reasons add up to the fact that credit cards are too easy.  They're like any other bad habit - the easier it is to do, the more likely you are to do it.  Often.  If you keep junk food in the house, it's much easier to eat junk every night than it would be if you had to get dressed and leave the house to go purchase junk food somewhere at 10 p.m.

Should You Have a Credit Card?

Do you pay it off?  Are you in that meager 22% of people that actually pay them off every month?  You might be.  And if you're not paying a yearly fee (never pay a yearly fee to use your own money, come on now), then maybe you're getting some benefits.

Are you building credit?  Some people also want to use them to build their credit score, but the downsides and necessities of credit scores are for another post.  Suffice it to say though that you don't need credit cards to build credit so I wouldn't use this as a reason to have them.

Do you online shop?  I do see the advantages when it comes to online shopping, since a thief wouldn't be able to get your money out of your checking account if they stole your credit card number, but I try to avoid online shopping so this isn't applicable to me.  Your debit card offers the same protections as a credit card, but seeing the money actually leave your account is stressful, so I can understand why people want the extra wall between them and identity theft.  But shop in person man, it's more sustainable anyway.

Do you travel a lot?  You almost always need a card to book a hotel room or rental car.  You can use your debit card, but they will put a hold on a certain amount of money so if you don't keep a large buffer in your checking account, this can be a real deterrent to people.  My lack of travel makes this point a non-issue for me, but it can indeed be much harder to travel without a credit card.

Personally, I don't have a credit card.  I mean, one exists somewhere in the vicinity of my home (the safe, I imagine) but I don't use it.  I'm too lazy to close it, though I could whenever I wanted.  I don't see the perks of using a credit card, but to each their own!

Do you have a credit card?  Are you responsible with it or no?

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