Credit Cards: Good or Bad?

Regular reader John C. A. Manley writes:

Ryan, check out the post below. It raises a question I’ve been debating in my mind for quite some while: Whether to use credit cards at all. I’m strongly leaning towards not using them for anything, especially since I can pay for stuff online with PayPal straight from my bank account. Anyways, thought it might be a good topic for your blog (if you haven’t already covered it).

The post John was referring to was this one by Debt Free Mom. It’s quite a good article, actually. Anita (the author) points out four reasons why using credit cards is a bad idea… even if you’re earning reward points.

The most persuasive reason she lists is this: When you use credit cards, you will spend more money no matter what. How could this be? Simple: “Dun & Bradstreet studied this and found that people spend 12-18 percent more when they pay with a credit card instead of cash.”

My interpretation: Credit cards create the illusion that you have more spending power than you actually do. So you will naturally spend more money than if you were paying with cash.

Ever tried to break a $100 bill? It’s tough. You know once you spend part of it, the rest will go quickly.

But charging $200 or more to a credit card is easy because it pales in comparison to the total credit limit.

3 Reasons to Avoid Using Credit Cards

1. You will naturally spend more money than you would otherwise. (See proof above.)

2. Heavy use of credit cards causes a general rise in prices as merchants seek to pass off merchant fees on consumers. Simplified, this means that: Credit Cards + More Frequent Usage = Higher Prices

3. Multiple credit cards adds unnecessary complexity to your life. It’s only a matter of time before you overlook a statement and get slapped with a late fee.

All that said, here are…

4 Reasons Why I Plan to Continue Using Credit Cards

1. I’d rather travel with a credit card than a huge wad of cash. (I still remember bringing $2,000 in cash on my honeymoon because I couldn’t get a credit card. For the duration of the honeymoon, I was paranoid that I’d lose the cash or somebody would steal it.)

2. Credit cards automatically track spending, which eliminates the need to save and file receipts. This is extremely important to me since I am self-employed and have to track every expense in my business. I never pay for business expenses with cash.

3. I pay for multiple business-related services on a recurring monthly basis. This would be impossible to do on a cash-only basis. And while I could use PayPal for everything, I’ve found PayPal to be a huge pain in the butt from a record keeping perspective. Even trained CPAs have trouble tracking the money/fees/transfers, etc. What’s more, PayPal fees are higher than credit cards. Imagine how much prices would increase if everybody started using PayPal in place of credit cards!

4. Total credit available and recency of usage are used to calculate credit scores. And while some folks may shun credit scores entirely, I think it’s critical to pay attention to your credit score. In the U.S., you can’t even get certain utilities hooked up without a good credit score.

What About Reward Points?

While some people are bonkers for rewards points and frequent flier miles, I’m not a big fan of these programs, even though I’m enrolled in a few of them.

Here’s why…

Tracking and spending reward points is a hassle. It’s never that easy.

Furthermore, for every $1 the credit card company generates from your purchases, you get pennies back. You’re merely being paid out of the credit card company’s profits.

How about this? For every $1 you give me, I’ll give you $0.25 back.

I’ll do that all day long. And so will the credit card companies. That’s basically how reward points work.

Best case scenario, just pay the merchant in cash and save yourself the $1 transaction fee. Of course, I’m talking theory here. It works a little differently in practice. Because it may cost a merchant just as much to accept cash as credit.

With credit, he pays a merchant fee and everything is tracked and settled automatically. With cash, he’s got to count all the money. And there’s a real cost to counting cash and reconciling the books at the end of the day.

As you can see, I think about issues like this one a little differently than most folks since I’m in business for myself. I think like a consumer, but not strictly as a consumer. I think as a businessman as well (and I know John C. A. Manley does, too).

Summing Up…

I do think we all would be better off if we curbed our dependency on credit cards. I think a mostly cash-based society would be far healthier than the mostly credit-based society we currently live in.

Nevertheless, I believe there is a time and place for credit cards. They provide a service that I find especially useful in certain situations.

What are your thoughts? Leave a comment below.