What Dave Ramsey doesn’t recognize about credit cards
Credit cards are not for everyone. But when used correctly, they can deliver rewards and perks you can’t get anywhere else – perks you can get without spending the extra money.
Dave Ramsey, a popular personal finance expert, doesn’t shy away from credit cards. He often cites data showing that consumers spend more when they use them compared to cash and that the majority of credit card users don’t pay their balance in full each month.
Taking this information in isolation, Ramsey’s position that the responsible use of credit cards does not exist seems logical. And there are people who would do well to take his advice. But what Ramsey never recognizes is that there is no one-size-fits-all approach to personal finance or any particular financial product. Some people manage their finances more responsibly than others.
Will you really be spending more?
Several studies support the idea that consumers who pay with credit cards generally spend more than those who use cash. Ramsey quote one in particular, a study by Dun & Bradstreet which found that plastic users spend more on average than those who carry only cash. The study indicates that this is the case because it is psychologically more painful to hand over cash than to swipe a card, whether it is credit or debit. (Ramsey recommends using debit cards.)
There is also anecdotal evidence that seems to point in this direction. For example, in 2004, when many fast food restaurants were just starting to accept credit cards, John Schuessler, then CEO of Wendy reported that the average transaction for credit card purchases was $ 7, compared to $ 5 for cash purchases, an increase of 40%.
However, a 2009 study conducted by Carnegie Mellon University economics professors Elif Incekara-Hafalir and George Loewenstein, found that “credit card use did not significantly increase spending, on average” for subjects in study.
The conclusion of this study does not necessarily negate or refute other research on the issue. But what this suggests is that the study data cannot be extrapolated into a standard answer that applies to everyone. Credit card users can avoid overspending by keeping a monthly budget and tracking their spending diligently, just like people who don’t use credit cards.
The payment of interest on credit cards is not acquired
According to The data published by the American Bankers Association in December 2015, nearly 30% of credit card accounts are “transactors,” which means they get paid in full each month and earn no interest. Conversely, 41% of accounts are revolving accounts, that is, they carry a balance from month to month, accumulating interest on the unpaid amount. The remaining 29% are dormant.
Since more consumers have a balance on their cards each month than they pay off, it’s not unreasonable to suggest people think twice before using credit cards. With nearly 60% of credit card accounts dormant or paid in full each month, however, it doesn’t seem like credit card debt is inevitable for all users, as Ramsey often suggests.
You won’t get rich, but you can get more
Ramsey adds to his argument against credit cards by saying, “No one ever said they got rich on credit card points.” And he’s right. There are no credit card millionaires out there.
But “getting rich” is not the purpose or promise of credit card rewards. Credit card companies want you to use their cards, so they offer cash back, points, and travel rewards as an incentive to do so. Use a card for purchases you would have made anyway – for groceries, for example, or gasoline for your car – and you easily rack up rewards. Depending on what you spend per year, you could earn hundreds or even thousands of dollars in rewards each year without changing your habits.
This, of course, only works if you use your credit card responsibly.
Tips for responsible use of the credit card
Ramsey’s advice isn’t right for all consumers, but it isn’t wrong for every consumer, either. Many people indeed spend more when using plastic – credit and debit cards – than if they used cash, which can lead to crippling debt for some. However, developing responsible spending and borrowing behaviors can help you reap the benefits of credit cards without having to worry about debt.
Budget and track your spending. Whether you are in debt or not, creating a monthly budget can help you stay on top of your spending. However, just having one will not magically force discipline. Tracking your spending is essential to make sure you’re on budget. If you find that using a credit card is forcing you to exceed your budget, consider switching to cash until you’ve developed the necessary control.
Keep an emergency fund. A lot of people are going into credit card debt because something bad is going on – the car breaks down or they lose a job – and they don’t have enough savings to weather the storm. It is important to include an emergency fund in your budget. Treat contributions to this fund as an obligation that you have to pay, rather than just saving what is left (if any) at the end of the month. The more cash you have, the less credit cards you will need to keep you afloat.
Pay off your balance in full each month. It may be worthwhile to postpone paying your bill to another day. Sign up for your credit card company’s due date reminders and consider setting up automatic payment for the total card balance so you don’t forget.
Don’t sign up for a card just for the bonus. Many credit cards offer signup bonuses to attract new customers. But you must meet a spending requirement within a certain period of time to receive the bonus. If you don’t meet the requirements with your normal budgeted spending, you might be better off with a card with lower spending requirements, even if that means a lower bonus.
The bottom line
For all the data generated by the studies, they do not correspond to all situations. For example, while a 2015 study by Experian Shows Millennials Have The Lowest Credit Scores Of Any Generation, Some Savvy Millennials Have taken charge of their credit and has achieved enviable credit scores.
Ramsey’s advice on credit cards is respectable. Those who have struggled with overspending and credit card debt in the past would do well to take this into account, and those new to credit cards should be aware of it. But millions of Americans practice responsible use of credit cards and enjoy rewards and benefits without sacrificing their financial well-being.