Several financial experts (most notably Dave Ramsey) preach that, if you want to become and remain debt free, you must not use credit cards. Ever. Their reasoning is that, a) it is too easy to get into the debt trap when using cards and, b) that you spend more money (around 25% more) when you use a credit card than when you use cash. Well, as a debt free person, I’ll tell you that it is entirely possible to use credit cards and remain debt free. The trick is to be disciplined and responsible.
I have used credit cards from the time I was in college and yet have never accrued any debt that I could not immediately pay off. How is this possible and why not just use cash? I choose to use cards because of the convenience, protection and, of course, the rewards. Using credit cards and accumulating the rewards is a great way for me to stretch my purchasing power a little bit further. However, I only use the cards for things I would buy regardless of the payment method. Gas, groceries, clothing, etc. all go on the cards. Even some utility bills are paid on my credit cards. I remain out of debt because I never use the cards to buy anything that I could not pay cash for on that day. I pay the balance in full every month and pocket the rewards.
I am very disciplined when it comes to credit card use. I do not view them as a way to pay for things I could not otherwise afford. That is a sure path to debt. Instead, I view them as one of many tools I have in my financial toolbox. They are simply one more way to pay for the items I need, and I evaluate in every situation whether or not a credit card is the right way to pay for something. If it is a high cost item (that I have saved and budgeted for) that will yield a lot of rewards, or if it is something on which I’ll want additional consumer protection, I go with the card. I use the card when I travel (but, again, the travel has been budgeted for) because you just about have to use a card when you want to rent a car, reserve a hotel room, or book a vacation package. I use the card for emergencies and when things crop up like broken appliances, car repairs, or medical issues. But even then, I have the money saved in other accounts and the credit card is merely a payment tool, not a financial crutch. I use it on everyday expenses that I have to buy, regardless of payment method, like gas, groceries, or household items. Even though I’m using the card and reaping the rewards, I still shop for the best deals, use coupons, and try to keep the price of items as low as possible.
I don’t use credit cards for things that I just want. If I want something that isn’t in the budget, I’ll use cash because cash makes me rethink the purchase. I have to stop and ask myself if that item can be covered in the budget and what kind of damage it will do to my budget. It makes me think about whether I really want the item or if it’s a passing fancy. Sure, I could just plonk down the credit card and pay it off at the end of the month, even if I had to transfer the money from savings, but that is the path to overspending and debt. I also don’t use a credit card if I can negotiate (or the retailer automatically offers) a cash discount.
Despite what the financial experts say, I don’t find myself spending more when I use cards than when I use cash. I’ve lived life both ways. I’ve had times where I paid cash for everything and I’ve had times where I used the cards for almost everything. In each situation, my spending has remained constant. As I noted above, whether I’m using cards or cash I actively seek out the best deals, use coupons, and shop sales or the used market. Since I rarely buy things I don’t need or that have not been budgeted for, there is little impulse spending with either method. If I don’t have the money for the item that day I don’t buy it, regardless of payment method. Period. The reason people spend more with cards than cash, I think, is because they do not exercise this discipline. They see a credit card as a chance to spend more or to relax their hunt for bargains because it’s so convenient to use the card. However, if you are disciplined in your spending regardless of the payment method, there is no reason why a credit card with a good rewards program can’t be a valuable addition to your financial toolbox.
If you want to use credit cards and remain debt free, you must read the fine print and stay involved with your account. Credit cards are notorious for changing payment due dates, raising and lowering limits, and changing rewards programs. While the interest rate may not matter to a debt free person, you have to keep watch on your account every month so that you don’t get tricked into missing a payment by a new due date or get socked with an over the limit fee when the card lowers your credit limit. You have to know all of the rules of your account and keep up with the changes. Yes, this is a worry you don’t have with an all cash lifestyle, but cash carries it’s own set of worries such as theft, no consumer protection, and it can limit your travel and Internet purchase options. No payment method is perfect and they all require your vigilance and involvement. Credit cards require your attention to be used wisely, but honestly you should devote attention to all of your financial tools.
A credit card is not inherently evil or an automatic debt creator. A credit card is a tool that can be used wisely or abused. If you are disciplined with your spending, a credit card can let you accumulate extra rewards and provide you with some convenience and protection you don’t get with cash. There is no need to spend more with credit than with cash. A debt free life revolves around a budget that you adhere to, regardless of how you pay for your expenses. Cash or credit only matters when the item is out of your budget and you don’t want to get carried away. Using credit in that circumstance is what starts many people on the path to trouble. Otherwise, if you are responsible and disciplined, it is completely possible to be debt free and use credit cards.