Is Dave Ramsey right about credit cards?
The popular radio show host says credit cards should be avoided. But do his arguments make sense?
This post comes from partner blog The Dough Roller.
According to Dave Ramsey, and I quote, "Responsible use of a credit card does not exist." He then goes on to add that there "is NO positive side to credit card use." These quotes come from Dave's website in an article entitled, "The truth about credit card debt."
When I hear this extreme view, my mind immediately recalls saving thousands of dollars and getting out of debt faster with credit cards that offer balance transfers. I also remember all of the vacations we've taken for free or for substantially less than full price because of travel reward credit cards -- Guatemala, London, Detroit (don't ask).
So I decided to dig deeper into Dave Ramsey's view on credit cards. What I found shocked me. He certainly has a few reasonable arguments against the use of credit cards. But his extreme view that it is impossible to use credit cards responsibly is based on arguments that are frankly irrational and paranoid. So let's take a look at why Dave Ramsey thinks credit cards are evil.
You spend more with plastic than cash. Dave's main beef about credit cards is his view that you will spend more money if you pay with credit cards than if you pay cash. That statement is of course a gross over-generalization for two reasons. First, while some people will spend more money using plastic than cash, not everybody does. In fact, one study by Carnegie Mellon University found that in some cases using a credit card actually reduced spending.
Second, certain types of spending are insulated from overspending. For example, we use the Capital One Venture Rewards credit card to pay our cellphone bill each month. The cellphone bill is the same each and every month. Paying with cash or by check wouldn't reduce the cost. The same is true for buying gas, paying for health care, and making certain charitable contributions.
Still, the notion that some folks will spend more with credit cards in certain circumstances than if they paid with cash is undoubtedly true. It's just not true for everybody all the time. Dave's claim to the contrary is simply wrong.
But then Dave goes on to harpoon credit card rebates, although his logic is twisted. He writes:
If you were using a credit card at 5%, you would have had to have spent $80,000 to get $4,000 rebates on new cars that lost $6,000 of value when you drove them off the lot. That is not a good deal!
Huh? First, the $6,000 in lost value would be true even if you paid with cash. Second, if his point is not to buy a new car, fine, but what's that got to do with taking advantage of a 5% cash-back rebate offer? This example is timely for me, as we are about to buy a Hyundai Sonata Hybrid, and I plan to use a rewards credit card if the dealer will let me.
Millionaires don't get rich on credit card rewards. In one of his radio shows, Ramsey also said he had met thousands of millionaires, none of whom told him that they got rich off of credit card rewards. While his claim is undoubtedly true, it's also pointless. In the legal world, we call that a "straw man" argument. Nobody I know of has ever suggested that credit card rewards will make you rich. But why would you turn away free money? Post continues after video.
Credit card companies will "misplace" your payment and charge you a late fee. This is where paranoia takes over for Dave and credit cards. In response to a caller's question, Dave claims that credit card companies will eventually "lose" your payment, forget to post your payment on time, and then charge you a late penalty. Don't believe me? Check out this clip. Dave's claim that credit card companies will intentionally "lose" your payment in order to charge a late fee is near the one-minute mark.
This is just plain silly. Here's the deal: If avoiding credit cards is best for you and your family, by all means don't use them. On the other hand, if you can control your credit card use, then by all means take advantage of cash-back or travel rewards. We do, and most of our trip to the Grand Canyon this summer will be paid for in travel rewards from Capital One and American Express.
More on The Dough Roller and MSN Money:
Remember if the credit card companies didn't profit by getting people to use their cards for "rewards" then the programs wouldn't exist in the first place.
Wow! If any article has ever missed the point with respect to what Ramsey is all about, this would be it.
On the whole...credit cards cause more harm than good...again that is on the whole...
Pay off your card every month blah blah blah...The whole credit card business model is based on getting people to carry balances...keep the suckers paying as long as possible. It is a sheer numbers game. X=people who carry a balance. Y=people who pay balance monthly and actually earn a reward...I guarantee X is substantially greater than Y.
If you truly comprehend his entire message and program you will realize that you won't need credit cards because you will have all the cash you need to make your purchases and pay bills.
Whether you agree with Ramsey on the credit card issue, you can't argue that he offers excellent advice for the vast majority of Americans. You see articles and polls on MSN all the time punctuating just how financially irresponsible we are, as a country.
Only a small minority of Americans have a decent nest egg saved, and most people live paycheck to paycheck, planning to just barely make it to retirement, where they'll attempt to scrape by on what's left of Social Security. (Hint: that's not going to work in 10-20 years).
Keep in mind that Dave's advice is for the average person, not the small minority of financially-responsible people who can control their spending. Ramsey offers common sense advice that will get debt-plagued Americans from emergency status to millionaire status with a little hard work and some realisitc goals.
While I have found Dave Ramsey has some very good and pertinent financial advice I haven't been able to totally agree on this point with him. I think credit cards like any other financial instruments are a tool if used properly or a trap if used improperly.
It comes down to what works out better financially for that individual or family. Some will find it to be a good exercise in self-control while others will find it a trap.
The person who has the credit card and uses it wisely is the wisest compared to the one who simply doesn't have a credit card and therefore can't use it. My reasoning is this: First, you control the card and the card does not control you. Second, having a credit card and using it wisely will improve your credit score as time goes on.
I believe that everyone who pays cash should get a 3 to 5% discount. If you don't use credit cards, you shouldn't have to pay the fee.
Ramsey ought to know better than to give cookie-cutter advice.
He may not like what I buy with my credit card, but that's not his business unless I am in trouble. But I'm not. The fact is, I pay my bills in full and on time, and have savings.
I saw a couple credit cards offering 0% APR for a year, sometimes 15 months, and an extra $100 for signing up. If somebody was making a large purchase, who's crazier -- the one who pays it all up front and puts himself in a tight spot in the meantime, or the one who spreads it out and pays a portion every month while accruing promotional rewards? This was my reasoning in applying. Even in the unlikely event that I experienced some crisis, I had an emergency cushion that under normal circumstances I would not touch, and I would have had the better part of a year to figure out what I would do. Let's say you buy something for $1200 and a crisis happens in month 11: if you've been putting down $100 every month, by then you'd have it almost paid off anyway.
Schmitty: you may be right, but the whole point is that Ramsey's comments aren't geared toward "a majority," they ostensibly apply to everybody. He's saying it's impossible. And by virtue of that, he's simply wrong.
All I was trying to fond out was if you had credit cards that were stolen 30 years ago, and these creditors are still trying to hold you accountable. Is this right when you paid what you had charged on the credit cards that were stolen?
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