Credit cards provide a safe and convenient avenue for short-term borrowing. When used wisely and responsibly, credit cards provide valuable benefits that cash simply can’t including consumer protections, cash dividends and other rewards. They can also help establish and improve one’s credit rating, which is especially valuable when shopping for long-term credit to buy a home or car.
The bottom line: Yes, credit cards can get careless people into a lot of financial trouble. However, that’s no reason for responsible folks to eschew them, any more than it makes sense to avoid using steak knives because they can be dangerous.
Photo Credit: shawnzrossi
I never understood why some people insist that “credit cards are evil” or “credit cards can ruin your life” when it is the person using the card that controls their fate. I love my credit cards for so many reasons. The trick is to pay them off in full at the end of each month.
Well, there are negatives to credit cards beyond the fact that some people are irresponsible with them.
For instance, I read a post on Man Vs Debt (I think…) in which he argued that the fee that grocers are charged for customers’ credit cards is then passed back to the customer in the form of higher grocery prices. So it can be argued that by not using cash we’re causing an increase in prices at the grocery store and other shops.
Red: I read — and responded to — that article at Man vs Debt when it was first written and, quite frankly, to be kind, Baker’s logic was, well, extremely twisted. Credit cards are a cost of doing business, and are no more responsible for higher prices than the cost of things like the electricity to run the store, rent, and other overhead. 🙂
For most businesses, the biggest cost impacts are due to the price of labor.
I totally agree. I’ve never paid a dime in CC interest in my life except for one unfortunate month when work travel was extended and I mailed a bill late. It seems to me that CCs are very useful, and nothing to fear, when used responsibly and paid off every month. They can’t take advantage of you if you are not complicit in and a partner to that arrangement.
I think there are a lot of things in life that if used irresponsibly can be extremely harmful, credit cards are only one. Alcohol can be ok for many if you drink in moderation. But if abused it can lead to alcoholism and liver failure. Eating rich foods can be enjoyable, but if you eat rich foods every day your waistline will suffer. Same thing with credit cards. If you abuse them and spend money you don’t have consistently, your bank account will suffer. It all comes down to making sure you’re not over-indulging in credit – but using it responsibly as part of an overall financial plan.
I think their biggest benefit is in payment protection. Payment protection really helps me feel better about buying things from businesses/e-retailers with whom I haven’t done much business before.
The steak knife analogy helps me in making my opposing point. I’d strongly recommend against using steak knives if the makers of the knives made money every time you cut yourself and spent all of their development budgets and marketing dollars trying to get you to cut yourself…
Credit card companies exist and profit because 90% of the population has tendencies towards overspending and being unable to pay off the balance each month – which makes the credit card companies smile. They like it when we cut ourselves. I don’t think the same can be said for Ginzu.
Liz Weston wrote an article (http://goo.gl/NesWq)last week also advocating the use of credit cards where she admits:
“Rewards programs such as cash-back cards tempt many users to spend more on the cards and carry more debt. A Federal Reserve Bank of Chicago study found that in an average month, a customer using a 1% cash-back card got an reward of $25 but spent an additional $68 on the card and increased his debt by $115. Interest on credit card balances would more than wipe out the benefit of any rewards.”
Yes, but Daniel, what you state is not inevitable or necessary if one is disciplined. I got almost $400 back on my credit card last year, and spent $0 in interest or late fees and added to my debt not at all. They are paying me to use their card. And I don’t over-use it or buy more because of it, as I manage to my budget.
Those average statistics you mention are NOT made up of a whole bunch of people doing the average behavior, but instead a curve of behavior. There are a lot of people like me – with no problems and a net gain from using CCs – and a lot of people with huge debt and no ability to control spending and a net loss. They are neither dangerous nor a negative for my use.
I like credit cards because they are convenient! I find it easier to return things using a credit card. Last, I earn frequent flier miles when I use them.
I’m with ya Len! I try to pay for everything I can with credit. Not because I go into debt (I actually have never not paid my balance in full), but because I love the points and the interest free loan!
I realize thought that not everyone is as super-anal as me and if you can’t pay off the card, don’t use it.
@Diane: Just for the record, if you regularly pay your credit cards off in full each month, but are late with the bill due to unforeseen circumstances, there’s a simple trick you can use to get those charges waived. In fact, I wrote about it here: http://lenpenzo.com/blog/id1248-a-simple-trick-to-get-credit-card-interest-charges-waived.html
@Pete: I’m with ya, brother! 🙂
@JT: Yep. Buyer protection has saved me more than few times over the past 20 years.
@Daniel: Hmm. I respectfully reject your argument out of hand because it assumes people have no free will. I fail to see how a credit card company, regardless of what it says in its adverts, can forcibly make a person spend more money than they can afford. Sorry, but I believe people who get into trouble with their credit cards have only themselves to blame. To pawn their lack of self control on the credit card companies is just making excuses. 🙂
@krantcents: I’ve earned thousands of dollars in cash dividends from credit card companies over the past five years or so — and that’s not counting the money I saved from all the interest-free loans the credit card companies have given me each month!
@Coach: Exactly. If you can’t pay the card off at the end of the month — don’t use your credit card. It’s quite a simple concept. 🙂
Totally agreed, len. Even though I’ve had a problem with credit card debt, I still dont think they are bad. There is nothing wrong with the card, the problem was the fact that I was buying things I cant afford. A credit card may have helped me do that, but I could have done it without the credit card too.
I believe a lot of people think they are a lot safer and wiser than they really are financially, which is why so many people get in trouble with credit cards. It certainly isn’t everybody, just like not everyone who drinks and drive gets a DUI.
I think some people should never touch credit cards…or drive a car…or a million other things.
But, credit cards are not inherently evil. Like most things in life, there is a negative side if not used responsibly. People need to stop blaming other things and look at themselves.
I LOVE the last credit card I cancelled and have not yet cut up – it is so effective at getting ice off my car window in the morning….
Americans are the most marketed to people on the planet. Period. This is why the credit card issuers raked in BILLIONS.
I, too, am one of those people who paid my bill in full, every month, without fail, and on time for THIRTEEN years. Thirteen years later, I added it all up (yes, I am a nerd and had kept all those statements). I found out that I had spend over $100K in that time period.
I haven’t had a credit card in over 3 years now…and guess what? There is a life without them, they are not for me, even though I was highly disciplined.
I love love love getting 0% cards because I use them for absolutely everything I buy, pay the minimum each month, put the rest of the $ I spent that month in the bank. Then I pay it off in full before the interest goes up at the end of a year (or however long they give me).
I get rewards as I spend, and I get interest earned from putting the $ in the bank. I’ve been doing this for years.
ALSO, I keep on a budget by using the envelope system with my cc. Yep, that’s right. I just use Monopoly money to represent my budget! I round up or down to the nearest dollar when accounting for my spending. Works wonderfully!
I think that education on the use of credit cards has slowly declined over the years. Kids are getting credit cards before fully understanding the pros/cons of using one. That can be a scary combination.
My partner and I use credit cards for the majority of transactions…we like the rewards we gain. However to keep them under control, each time we get home and log onto the PC, we pay the money spent straight to the CC company. You do not have to wait for the bill. The receipts are kept on a bulldog clip until we see the payment go out and our repayment go in..sounds like hassle? Once you get used to it, it is easy.
@Jeff: Good man, Jeff. Unfortunately, there are a lot of people out there who have had trouble with credit cards in the past who blame the card for their behavior, instead of looking the mirror — and so they associate credit cads with “evil.” Unreal.
@Shawn: Agreed, some people should not have credit cards, if only because they have not learned to control their impulses.
@Everyday: Yep.
@Spedie: Good for you! Absolutely, life goes on for those who choose to live without credit cards. I’m just not willing to give up all their perks and benefits. Especially when they pay me hundreds of bucks a year to use their card. 🙂
@Angie: Using monopoly money to budget, eh? Interesting! Hey, whatever works for you is the right way to do it.
@Jenna: Which is why I advocate using a virtual credit card handed out by the Bank of Dad. Here is an article I wrote about it at Currency: https://getcurrency.com/article/the-virtual-credit-card-and-the-bank-of-dad
@Derek: Another great idea! Why wait for the bill to come in? That can definitely help keep you from spending more than you earn.
Credit Cards themselves are not evil. well maybe some of the interest rates associated with them are. 🙂 If used responsibly they can be a great tool. It really comes down to the individual using them. Some people lack the discipline to handle them properly.
Agreed, Brian.
Credit cards SAVE me money. All the recurring bills are paid from the credit card, saving 49 cents a month for a stamp to send each bill payment to each company each month. We never miss a payment this way so we never get hit with a late fee. We accrue frequent flyer miles also which means flying anywhere in the world for only a few dollars for the fees for the free tickets. If you use a United Airlines credit card, you get 2 miles per dollar for every dollar spent buying tickets, and get a free bag on flights and two free lounge passes each year. The secret is to pay the credit card off in full twice a month so you never get hit with interest. Credit cards aren’t evil, they’re a tool for healthy financial life. Any tool which is misused can hurt you. Americans are reluctant to take blame for anything, but the misuse of credit cards is the fault of the person, not the card.
Well said, Karen. I agree with everything you said!
My one rule for my credit card: If I will be using the good or service by the time the bill is due, I may use the card. This by definition restricts dining out on the card.
Corollary: Online purchases go on the card, for the protection. Everything else gets a $2 bill, the mark of sophistication.