Saturday, June 13, 2009
Credit Cards are not the Devil
I read a lot of PF blogs, and a lot of PF bloggers love Dave Ramsey. They love him so much that I think some of them would like to bear his children (whether or not that would be biologically possible). So I finally broke down and read The Total Money Makeover: A Proven Plan for Financial Fitness, admittedly mostly to see what all the hype was about.
I don't want to knock the guy too hard, as his system obviously works for a whole lot of people, and you haven't noticed me writing any bestselling PF books lately. He has some good advice: figure out what you make, spend less than you make, know your debt, pay down your debt, make sacrifices now to save yourself the pain of compound interest on your debt, etc. However, his methodology, the snowflake, seems counter-intuitive to me. I think that my brain just doesn't work the same way his does - to me, 1K of debt is the same whether I owe it to one creditor or 10. So paying down smaller amounts, rather than higher-interest amounts, just doesn't make sense. As far as pop-culture PF books go, I strongly prefer Suze Orman's The Money Book for the Young, Fabulous & Broke, as I felt that it had better debt reduction and savings strategies for the way my brain works.
My real issue, though, is his insistence that those who follow his plan cut up all credit cards. Don't get me wrong - I have gotten in trouble with credit cards before myself. However, the problem was not the cards, the problem was that I spent more than I made. Once I solved the problem, credit cards became a very useful tool for me.
I make over 1K a year by using credit cards. I currently have 4 - an AMEX, 2 Mastercards, and a Discover. None of them has any annual fees. I use whichever card will give me the most cash back wherever I happen to be buying stuff. I try to get Mr. Goat to do the same, but he doesn't have the same love of cash back that I do, so he does so only when he remembers. I pay all four balances off each month.
Additionally, I don't have the problems inherent in carrying cash. I don't worry about being mugged with this week's grocery budget in my purse. I don't drop cash accidentally. I can tell panhandlers straight out that "I never carry cash," thus removing the temptation to give them money. (I refuse to give panhandlers money as a matter of principle, but my principles are easily tested by a hard luck story.) My wallet doesn't present any temptation to my housekeeper.
Finally, as part of my budgeting process, I track all my purchases. Credit cards make that way easier - if I somehow lose a receipt, I know that it will show up online in a couple of days. If I ever get really organized and start tracking using Quickbooks, I'll be able to download my tracking automatically.
The credit card companies pay me for all this convenience. All I have to do is pay my balances on time, in full, every month. Since I am checking them every couple of days to crosscheck the accuracy of my tracking, it is easy to schedule a payment as soon as the bill comes due. The power of the Internet has allowed me to do this even while living in China.
More importantly, if you close all of your credit card accounts, it will wreck your credit score. Mr. Ramsey seems to think that you don't need a good credit score if you aren't looking to borrow, but the truth is that everyone from insurers to employers judge you by your credit score nowadays. It may not be fair, but it's the way it is.
I am not saying that credit cards are for everyone. If you don't enjoy item-by-item tracking, and prefer the jar method, cash is probably an easier and more efficient day-to-day option for you. Some people truly cannot restrain their spending with a credit card in their name; I agree that they should forgo the use of them. A universal ban, however, seems unreasonable to me.
Canceling all your credit cards is a lot like joining AA - you are making a radical behavior change that will put you outside the norm for our society, with all the consequences that that entails to your credit score. If you are an alcoholic, you may need AA. If you quit drinking as part of a plan to lose a little weight, AA is overkill. Mr. Ramsey is treating all his readers as though they have a credit card addiction; I don't think that we all do.
All addictions entail denial; do you think I am making a good point, or trying to use a good cover story?