Advantages & Disadvantages of Credit Cards

The debate rages on across America. What are the advantages to certain credit cards, what are the disadvantages? Shouldn’t I be using at least a card that gives 5% cash back on gas and groceries? A gallon of gas, normally costing $2.25, would now only cost $2.14. A gallon of milk costing $3, would now only cost $2.85…

And then there’s the advantage of free(?) airplane tickets. One family member I know used their free tickets to take all the kids to California – something they otherwise wouldn’t have been able to afford.

I personally am somewhere in the middle.

One huge disadvantage to credit cards isn’t from the credit card itself. It’s from the people that use them. Now, I know of the studies that have shown that you spend somewhere around 18% more when you spend with plastic instead of cash. Dave Ramsey touts that statistic at least every day. I did hear him mention a caveat the other day. Basically he said that if you are operating on a written budget, then you probably only overspend by about 10% – totally just estimating. The point he was trying to make was that if you have a plan going in to the grocery store, or wherever, you will probably not spend too much more if you use plastic or cash.

And then there’s the advantage of convenience. I personally don’t like to carry around cash (except for a $20 bill). Everything else I run through with plastic. I’ve also spoken with people who say that if they have cash in their wallet/purse, they burn through it quicker than anything. Psychologically – they explained – if they have the cash in their hand instead of in the checking account, it’s as if they’ve already “spent” the money. So they do.

However, back to that disadvantage. I just can’t take the extreme approach: ABSOLUTELY NO CREDIT CARDS! I feel it’s a bit simplistic. I don’t believe personal finance is really that complicated, but to throw out that absolutely NOBODY should ever use a credit card, that it will destroy them, that it will drive them to bankruptcy, that it will cause them to not live within their means, is just a bit too much.

Especially when we see how much companies are now looking at the FICO score to evaluate whether you can get auto insurance, property insurance, etc. Statistics drive these choices, and statistically you’re likely to make more claims, with a higher dollar amount per claim, if you have bad credit than good. Why is that? I have some guesses, but that’s for another time.

So you need good credit. Should you go out and borrow money to build your credit? No. That’s pretty silly. Should you get a credit card in spite of the disadvantages, or because of the advantages? That’s your choice.

Let me make this totally unsupported statement: 95% of all credit card holders would be better off financially without ever having their credit cards in the first place.

Just take a look at how many people want to get out of credit card debt so badly. I think 95% is a safe shot in the dark.

So, I have established my own set of rules to evaluate whether you are worthy of the advantages of a credit card – and protected from the potential disadvantages. If you follow these rules, I think you’ll be alright.

You must be:

1. Operating under a written budget.
2. Debt free except your home (owing on a car or student loans is debt).
3. Protected against emergencies: 3-6 months’ expenses in a good savings account.
4. Paying the credit card balance in full each month.
5. Writing down exactly how much you spend.
6. Contributing at least 10% of your income towards retirement.

If you cannot say “YES” to all six of these rules, then you are not yet ready for the advantages of credit cards. You are still to exposed to their disadvantages. Work on getting these six rules down, then evaluate whether you think a credit card would further you along on your road to financial success. Be aware of the fact that spending 3 hours finding the “perfect” card, could have been spent working, and earning the equivalent of probably six months’ worth of rewards! Keep all things in perspective.