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Saturday, July 17, 2010

Credit Cards are NOT Evil!

Dave Ramsey has the most popular personal finance radio show in the country. He offers a lot of good basic financial advice.

However, I don't agree with him on everything. One of the things he rants against every day is the use of credit cards. He says that no one should use them, ever.

Well, he's wrong. He often mis-represents a study that concluded that most people who use credit cards spend more money than they would if using cash. While it's true that MOST people tend to spend more using credit cards, Ramsey uses the conclusions of the study to claim that ALL people behave this way, which is simply incorrect. You just have to be more responsible than MOST people.

Those with discipline don't treat cash or credit card purchase any differently. They realize that credit cards are a nothing more than a tool. Like any tool that we use in daily life, if it is misused the consequences can be disastrous. Cars, guns, fatty foods, and credit cards can all lead to disaster if misused, that doesn't mean that no one should ever use them.

I contend that responsible use of credit cards is not only a useful convenience, but can also be mildly profitable and help you reach your financial goals.

A couple of rules for credit card use:

1. NEVER CARRY A BALANCE. I can't stress this strongly enough. If I told you to take a $20 bill out of your wallet and set fire to it, you wouldn't do it, but people routinely pay $20 and a lot more in credit card interest. Whether you set a match to your money or pay credit card interest, the money is simply wasted. Pay your balance in full every month, without fail. These days, owning a credit card should cost you nothing, because you can pay your bill online (saves the cost of a stamp).

2. Never pay a fee. I don't care if it's an annual fee or some other fee the bank dreams up- there is no need and no reason to pay these guys anything.

3. Don't worry about interest rates. For those who use credit cards properly and never pay interest, interest rates are irrelevant (10% of $0 is the same as 30% of $0).

4. Treat credit card purchases as you would cash purchases. Never buy anything extra just because you can buy it on credit.

Bottom line: Credit card usage should be 100% FREE. If you do it right, you should never pay a cent to the bank.

On top of that, many cards offer rewards. You get money from the credit card issuing bank, even though you never pay them anything. You won't get rich from these rewards (typically around 1%), but they can be a pleasant little bonus on purchases you would have made anyway.

I purchase almost everything with credit cards- I use cash so rarely that when I put $100 cash in my wallet, it lasts all year. I use my credit card even for a $3 purchase at Taco Bell or a $1.50 parking lot fee- because that little cash back reward adds up.

Over the past several years, my usage of credit cards has cost me NOTHING- no interest payments, no fees, not even the cost of a stamp. Over that time, I have accumulated hundreds or thousands of dollars in cash back and merchandise rewards (not to mention the bonus money many cards pay you to sign up).

Anyone can achieve similar results if they use their cards responsibly.

The hardest part is determining which card is best for you- a cash back card (Discover was one of the first to offer this), an airline miles card (United Mileage Plus, etc), or a merchandise card (e.g. GM Card).

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