Recently my wife and I became 100% debt-free except for the mortgage. Not only have we paid all off all our non-mortgage debt, but we’re moving in the direction of closing all credit card accounts. I’m on board with this idea, but my wife is not. I understand this could be a six-month process convincing her or it could never happen. Below I’ll attempt to debate all of the conventional arguments on why you should have a credit card. Also, I’ve included reasons why cash or debit cards are far superior to credit cards.
- When you pay cash for things, the chances of identity theft are zero. Now, I mean actual cold, hard, green cash not a debit card. If you are worried about a problem with your purchase be sure and keep the receipt. I’ve never once heard of a merchant basing the return policy on the method of purchase. All purchases by reputable retailers allows returns regardless of the purchase method.
- Reward or loyalty points are a great deal from all the products I get from using my card. Wow, let me walk through all of the flaws in this arguement. First, if you are a person who carries a balance, those reward items are free! Your interest charges are paying for those “free” products. If you are someone who never carries a balance you may think the rewards are still a sweet deal. What if an Act of God happens one month and a bill does not get paid on time? Wham! Finance charge on that card with the “free” reward points. Also, what if the bank makes an error on your account? If you don’t have an account you won’t EVER get a bill or an error on that bill!
- A credit card is good for emergencies. Well, I see two ways out of emergencies; your main checking account and a savings account/emergency fund. Do you want to know another saying for emergency credit card purchase? Poor planning. If you have a big enough emergency fund, how bad is the emergency that it will wipe out the account? A simple rule is that the bigger the emergency fund, the lower the chances of it being wiped out by any emergency.
- Home repair – maybe $2000 – $4000 if it’s really bad. Hopefully insurance covers something which is not your fault. Any other repair bigger than that may have been looming since you bought the house or you ignored the repair for too long.
- Car repair – maybe $2000 or so. Any more than that and it should be covered by insurance due to an accident or it’s time to look for another car.
- Health problem – maybe $500 – $30,000 for serious health problems. Any $30,000 medical bill may have been caused by no medical insurance or experimental treatment. These are certainly possible, but rare for most people.
If you are like me, a credit card creates a false sense of security to help you out of financial jams. However, when paying that emergency expense with a credit card you now essentially created another emergency (albeit a long-term one) with a new, large, unexpected debt. An emergency fund can solve many emergency financial problems. Living without one is like an acrobat flying without a net.
- I’m young and I want to build up my credit rating. As I detailed in The FICO Score Flaw a credit rating is basically a loser’s game. All it shows is how well you manage the revolving door of debt. A young person just entering the workforce likely has two major purchases on the horizon. A car and a house. Ideally you’d pay for both with cash, but that’s not in the cards for all of us. For the car purchase, most lenders will recognize that you have a steady income and approve you for a loan. For the home purchase, I’d strongly recommend the following: 20% down payment on a 15-year traditional (not adjustable rate or interest-only loans) mortgage. This shows the bank that you are a conservative borrower who takes this loan very seriously. Building up a 20% down payment and choosing a higher payment (the 15-year loan is a higher payment than the 30-year loan, but it’s paid off twice as fast) shows that you have commitment. If the bank balks at your loan application with no credit rating ask that the loan be manually underwritten.
- Credit cards are safer online that debit cards. First of all, if your bank tries to pin the unauthorized charges on you for either kind of online fraud, credit or debit, mention to them that they are violating federal law. The Electronic Funds Transfer Act (EFTA), which applies to debit cards, specifies your liability for fraudulent transactions is $50 if you notify the bank within two days of a lost of stolen card and up to $500 if you notify after two days. The Fair Credit Billing Act, which applies to credit cards, specifies your liability for fraudulent charges is no liability if the unauthorized use involved just the credit card number, and only $50 in the case of a lost or stolen card. So, it literally would take an Act of Congress to occur before your bank rightfully holds you responsible for unauthorized charges.
- I like paying only bill per month. I have many friends who put everything on the credit card and (claim) to write only one check for all their bills per month. Many times these are the same folks who use rewards loyalty points on their card. First of all, if you pay cash for all face-to-face transactions you pay no bills per month. For online purchases use a debit card only and either keep the receipt or record it in your checkbook. Now, back to the paying only one bill per month. Dunn and Bradstreet did a study that shows consumers spend 12-18% using credit cards than paying with cash. Exactly like poker chips, no emotional involvement occurs when swiping a plastic card. However, when you are pulling out ten $10 bills to pay for something, you feel the pain.
- I travel and hotels/rental cars won’t take debit cards. Um, time to change hotels. Ask to speak to the manager on why this policy exists. If you are traveling with a company credit card, keep in mind this is affecting your credit rating, not your employers. Even if the card is in their name.
- Credit cards are more convenient than cash. Smart personal finances are rarely about convenience. Convenience is what gets most people into debt over their heads. Impulse buys, payday loans, cash advances and credit cards are like everything else convenient….they’re expensive. It would be convenient for a limo driver to bring me to work everyday, but very expensive. It would be convenient to eat out for every meal, but expensive. You get my point.
The bottom line is that eliminating all of your credit cards is a trade-off. You may give up some convenience, but the peace of mind and better sleeping at night will make the trade far worth the effort.