Credit Cards

The use of credit cards is somewhat controversial among financial advisors. Some say it’s best to never use credit cards at all while others say their use is fine. Dave Ramsey, one of my favorite advisors, is opposed to using credit cards because studies have shown that people who use credit cards tend to spend more on unnecessary things than do people who don’t use them. Typically, interest rates on credit cards are high compared to rates for other types of loans such as houses and cars. By running up large debts on credit cards, you can end up spending quite a bit of money just on the interest. So, Mr. Ramsey recommends never using credit cards and, if you are currently in credit card debt, stop using them immediately and begin paying them off.

We personally approach credit cards with the same caution that the Bible recommends for drinking alcohol. Proverbs 23:29-35 says:

Who has woe? Who has sorrow? Who has strife? Who has complaints? Who has needless bruises? Who has bloodshot eyes? Those who linger over wine, who go to sample bowls of mixed wine. Do not gaze at wine when it is red, when it sparkles in the cup, when it goes down smoothly! In the end it bites like a snake and poisons like a viper. Your eyes will see strange sights, and your mind will imagine confusing things. You will be like one sleeping on the high seas, lying on top of the rigging. “They hit me,” you will say, “but I’m not hurt! They beat me, but I don’t feel it! When will I wake up so I can find another drink?” (NIV)

The Bible makes it clear throughout that drinking alcohol is perfectly fine as long as you control its consumption. However, as we see here, if you find that the alcohol is controlling you, then it is time to stop drinking it; cold turkey. We believe the same holds true for credit card usage. If you can control your spending, living within the budget you set for you and your family, then credit cards can actually benefit you. However, if you can’t control yourself, it is indeed time to follow Mr. Ramsey’s advice: cut up the cards now and pay them off as soon as possible.

Some of things we look for in credit cards are: no annual fees, no hidden fees, a 20-25 day grace period for monthly payments, and, most importantly, cash back bonuses. With a card like this, things you purchase will actually be cheaper because you will still pay the same at the store, but the credit card company will give you money back. For instance, we have one credit card that pays us 5% back each month for all gasoline purchases paid at the pump. We have another card that pays us 2% back on everything we purchase. Yet other cards pay us 3% back for purchases made at certain stores. The trick here is that you must pay off ALL your existing credit card debt and then begin to pay off all future credit card charges in FULL each month. By doing so, you will not be paying extra for interest and fees. Rather, the credit card company will pay you a percentage of all your purchases.

Be sure to pay off your credit cards each month ON TIME. If you fail to do so, interest will have to be paid as well as a substantial late fee. Most of the cards we use have a way to set up an automatic “pay-in-full” each month. Once set up, the credit card company will automatically remove your full balance each month from your bank or credit union checking account. If for some reason they are late transferring the money from your account, no late fees or interest are due because it was their responsibility. Of course, you must make sure you have enough money in your checking account to cover the bills when they come due, else you may find yourself facing overdraft fees from your bank and/or fees from the credit card company. Of course, you do not want to set up the automatic draft until you have paid off your existing debts and are ready to live according to your means.

To make sure you have money each month to pay off your credit cards, a budget item entitled “Credit Cards” needs to be added to the items mentioned in the previous post. Then, when a purchase is made with a credit card, the amount of the purchase can be transferred from the appropriate budget category into the Credit Cards category. For instance, suppose you spend $75 at the grocery store using a credit card. You have not actually removed money from your checking account, but you do want to account for the money in the Food category. So, when you next handle your budget, the $75 will be subtracted from the Food category and added to the Credit Cards category. This will let you know that you now have $75 less to spend for Food and, simultaneously, you have set aside $75 for when the credit card bill comes due. If you had used a check or a debit card at the grocery store, you would simply subtract the $75 from the Food category since the charge would have applied directly back to the checking account.

One last thing to keep in mind concerning credit cards. Some places charge a convenience fee when using a credit card. Usually these fees are more than what your cash back bonus pays you. In these cases, it is best not to use a credit card unless its use is truly more convenient and it’s worth the extra fee.

We’ll talk more about credit cards when we get into actually setting up a home budget in a spreadsheet.

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