My Credit Card Beef with Dave Ramsey

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 I've noted that I like Dave Ramsey for the most part (he's probably the one personal finance expert I agree with the most), but that we do have our differences. The main difference between us is what we think about using credit cards.

Dave's position is that credit cards are bad and no one should use them. My position is that if you use them to buy things in your budget and pay them off monthly, then they're ok. If you don't do these, then you shouldn't use them.

In his book The Total Money Makeover: A Proven Plan for Financial Fitness, Dave quotes the following about how many people pay off their credit cards each month:

CardTrak says that 60 percent of people don't pay off their credit cards every month.

Ok, so that's clearly a majority. But it also leaves 40% who do pay off their credit cards every month. Frankly, this was higher than what I thought it would be.

So shouldn't the 40% be "allowed" to use credit cards? Why is Ramsey still adamant that they should not?

He says that there are two basic reasons that even these people shouldn't use credit cards:

1. People will spend more when they use credit cards. At least one study has shown this to be so.

2. If you use cash, you can negotiate better deals with stores.

Here's my response to each of these:

1. There's a difference between what the average person does and what a person with discipline/self-control does. After all, the "average" person has debt, right? And yet some people control their spending enough so they don't have any debt. In the same way, not everyone spends more simply because they have a credit card. I don't think I do.

Now let me clarify a bit because there is some basis for what he's saying. I don't think I spend more than I want to with a credit card. But I do probably spend more than I would if I only used cash (at least in some situations). I know this seems to contradict what I just said, so let me try to explain using an example.

Let's say that I want to buy a new lawnmower. I do my research, know which one I want, and look for sales on the model -- my normal process for a decent-sized purchase. So I walk into Lowe's and see the model I want at a price I know is a good deal. If I have a credit card, I buy the mower. It was a planned purchase and, as such, I did not spend more than I wanted to.

But let's say I only use cash and I don't have enough with me to buy the mower, so I don't buy it. At this point, technically, I have spent less because I was using cash rather than a credit card. So by the letter of the law, Dave is correct.

But I think he only wins on a technicality -- and a weak one at that. What I'd probably do at this point is go get more cash, then come back and buy the mower. In the end, I haven't spent any less. All I've done is make my life less convenient and killed some time I could have been doing something I enjoyed. We have to remember that there is a value to time too, and using cash often costs us in time -- and, as in this case, doesn't really save us anything.

I guess my point is that using a credit card is convenient. This is probably Dave's point as well -- he'd say it's too convenient. I say that if you have self-control, the fact that you can buy anything you want with a credit card (and rack up a ton of debt in the process) isn't an issue.

2. Yes, but he'd then say, "If you would have offered cash for the mower, perhaps you could have gotten it for a better price." My response to this is, "Perhaps, but I'd consider this highly unlikely."

Now I'm usually the first person to advocate asking for a discount, and I think that's fair in a consumer transaction. (The retailer can always say no if he doesn't want to give you one.) But does having cash really get you a better deal in most cases? Maybe when buying a car, boat, or some other big-ticket item. Or maybe when you shop at a mom-and-pop store (which generally have higher prices anyway)? But would I have saved money by offering a lower amount in cash on the mower at Lowe's? I don't think so.

Now I know that you can get a discount at a chain store and that asking if there's a cash discount is one of those ways. And I have nothing against doing that. I'd certainly ask for a discount if I paid cash (then it might be worth my time to go back and get more cash). But then if they said "no", I'd create my own discount by paying with a credit card that gives me 2% back. Dave would just walk out at that point and keep looking for good deals on a mower. Maybe he'd find one and maybe he wouldn't. He may even end up paying more in the end.

Here's a real-life example: when we bought our furnace, we asked if there was a discount for paying in cash. They said there wasn't. So we charged it on our card and got back $155. We created our own discount by using the card.

So in the end, I think Dave and I are simply going to have to agree to disagree. I understand that most of his audience is in the group that can't handle credit cards, so he's right in giving him the advice he does. But for the rest of us, I think we can use them as long as we do so with self-control. As such, I disagree with Dave that there's a one-size-fits-all answer regarding the use of credit cards.

Comments

[David]

I think you somewhat miss the point with your lawn mower example. Ramsey is correct--not as much with large purchases, but with things like eating in restaurants or impulse buys in stores--studies show over and over that credit cards result in higher purchase totals. By paying cash, especially when using the envelope system he also suggests, you have a limited amount of money for ech category and are less tempted to purchase unnecessary items.
While you may well be able to pay off a credit card each month--the real comparison is whether you might have saved more or paid off more debt by sticking with cash.

[Spencer]

I think the reason Dave says what he says about credit cards is because of the crowd he attract. I'm assuming the vast majority of people who go through his system and read his books are already in debt and looking to get out. These are the people who haven't used credit cards responsibly in the past and probably won't in the future, hence the blanket statement about credit cards being bad.

I really like most of Dave Ramsey's advice, but if you have discipline and self control you have to take some of it with a grain of salt.

[FMF]

David --

"studies show over and over that credit cards result in higher purchase totals"

Can you provide some links to these studies? I've only seen a couple of them (cited again and again.) In addition, remember that what happens for the average person in a study is not true for all people.

To me, your restaurant example gets back to the convenience issue. I want a roast beef sandwich and fries. It's $7.99. I can afford $7.99 and have a budget for it. But I only have $5 in cash. Now I'm limited to buying something for $5 or less. (BTW, I have no debt and save the max in 401ks, SEPs, etc.) So now my life is going to be dictated by the inconvenience of the cash I have on hand?

Maybe the issue is simply the difference between someone just starting out in their finances (or not able to control themselves) and someone well down the road? Maybe that's the difference here -- as Spencer says:

"I really like most of Dave Ramsey's advice, but if you have discipline and self control you have to take some of it with a grain of salt."

I think he hit the nail on the head!

[Money Reasons]

I agree!

I can't recall ever carrying a balance on my credit cards (at least where they charged me interest), and the rewards credit cards has made me thousands in discounts!

There are many other benefits to carrying credit cards too.

It's funny really... Nobody is forced to use credit cards, but society seems to blame all of their financial woes on them.

If you're a frugal person, credit cards are great! I've been frugal all my life and have used credit cards to my benefit whenever possible. The key is not to carry a balance!

[SAHM]

My husband actually leads an FPU class, and we disagree with the credit card statement, too. But, we now save our credit card for major purchases and buying anything online. I used to put all my groceries on my card- hey anything to get some cash back. Then I decided to do the envelope system when we went through the class. It made a big difference. Now when I go to the grocery store, I bring the cash that I plan on spending. It helps keep me in check. But, this is a personal thing that helps me stay disciplined in my big area of purchasing monthly.

I agree, it is a matter of self-discipline. I know where I tend to spend extra money if I don't have the cash, so I don't bring the cc. But, we refuse to give them up completely. Even if we went to a total cash basis, we would use the cc for online purchases, major purchases, and to book/reserve hotel, rental cars, plane tickets, etc. It's too risky to do it otherwise.

[Johnson]

It is sleazy of Ramsey to encourage people to pay in cash. He expects a discount in part because getting cash allows the recipient to hide the sale for tax purposes.

Also, it's dumb and dangerous for people to carry lots of cash around.

[Mike C]

I agree with everything you say except for one statement...paying with cash won't necessarily get you a bigger discount when buying a car. If you finance the car with the dealer they get money from the bank/finance company and then may be more willing to give you a bigger discount.

I pay off my credit cards every month too and try to maximize my rebates so I use them for just about everything. Most of the time I would have spent the same amount if I had to use cash although I do think that the convenience factor plays into it. I can think of times when I wanted to stop somewhere for a bite to eat but didn't have much cash. If I didn't have a credit card I might have gone to a fast food place rather than try to find an ATM so I could go somewhere else. So in that case I probably did spend more than if I used cash only. That would be a small portion of my monthly spending though.

[FMF]

Mike C --

You are correct. At a dealership I visited a couple weekends ago, the salesman told us the dealership got $100 for every loan someone signed up for.

Still, I'd rather pay cash than take out a loan and save $100 (at most).

[Matt Jabs]

My wife and I definitely agree that we spend less by using cash (envelopes)... quite a bit less. That said, I use a cash envelope app on my phone that would help limit my spending regardless of the medium used. While I still use cash, if I used my debit card I wouldn't spend anymore because of my set category limits. Therefore my conclusion is simple... it is not so much cash vs. credit as it is setting category limits vs. not setting category limits.

[wanzman]

Johnson said:

"It is sleazy of Ramsey to encourage people to pay in cash. He expects a discount in part because getting cash allows the recipient to hide the sale for tax purposes."

I think this is absolutely a rediculous statement.

The burden is not on me to pay in such a form that it forces the recipient to report it as taxable income. If cash was not an acceptable form of payment, then the US government would not print it for us to use.

Saying it is sleazy for Dave to encourage people to use cash is way off base. I think it is admirable that Dave Ramsey has devoted his life to helping people avoid being swallowed up by credit card debt.

I am not necessarily a Dave fan, and I use credit cards wisely myself. But calling him out in this manner makes it appear that you have a bone to pick or something.

[Robert]

We use debit cards linked to accts with set, budgeted amounts deposited in them each month. So once the money gets low, that's it, which is similar to using cash. We used the envelope system and I just didn't like carrying around all that cash.

As for credit cards, we tried it last year and spent way more than usual.......and I'm disiplined and frugal (maybe not as much as I like to think, huh?). I see Dave's point and I see your point. I think we got in trouble bc we were trying to get as many points as possible for free hotel rooms, therefore we were more prone to over use the card.

Funny story about cash. Years ago, when first starting Dave, I sold a new car and found a used truck. I went in with a huge wad of cash, thinking I could flash the cash for a $1000 or so discount. I showed him the cash and proclaimed, "This is all I have on me." He said, "I take checks, too." My wife still makes fun of me for that one.

[Linda]

Another discount: many department stores offer significant discounts for using their card. My solution? Have the card, buy the items with the discount, walk to customer service and pay off the bill.

[Credit card devotee]

There have been so many times using a credit card has saved me money - there's NO WAY I'd start using cash, especially for bigger purchases. As a matter of fact, when we make purchases of electronics/appliances, we apply for and use the store's credit card. Why? Because if the thing we purchases doesn't work to our satisfaction, we have all the power to refuse to pay for it until it's replaced. Pay cash and you give the retailer all the power.

[Mark]

The studies about spending more when using a credit card have been about the fact that people don't "feel" the same loss/pain when they defer the payment.

It has nothing to do with being short of cash and not making the purchase, nor is it solved by the envelope approach. It is simply for one-off events, and highlights the fact that physically and immediately handing over cash feels more tangible.

Wasn't it on this blog that we read about how most people would rather have $100 today than $200 in a year, but if they had to defer for a month, they would go for $150 in a year instead of $100 in a month? It's the same issue.

[Tim]

Of course Dave Ramsey is happy to allow you to purchase HIS PRODUCTS with a credit card!

[sashie]

FMF

I think your examples miss some of the point of Dave Ramsey's "cash is king" advice. I believe that Dave would ask what you are doing at the hardware store looking to buy a lawnmower (or whatever) without the money to actually purchase it already saved up and with you to complete the purchase. I don't think his point is that an actual lack of money due to not going to the bank is what stops people from overspending on a cash only basis. It is the fact that if you use his method, you have already had to name every dollar that is coming into your house and already have a budget in place where every dollar is allocated. If you are in the market for a lawnmower, you know exactly how much money you have available to purchase it right now. Not purchase it now and then pay it off later with next month's money (or the month after that).

In the sandwich example, I think you once again miss the point. Why would anyone go somewhere to eat lunch without making sure that they had enough cash on them (if they are following Dave Ramsey) before they chose where they were going to eat and what they were going to eat? If the 7.99 lunch was in the budget, you would have 7.99 ready to spend. If this was an impulse not already planned for in your "name every dollar" budget, then you are indeed spending more money than originally planned.

I understand you pay off your credit cards in full every month. I understand that you are in a really good financial position. But, I also think that since you haven't done a cash only budget approach, you aren't really in a position to say what the comparison is or isn't. Our perception of what we think would happen in certain circumstances isn't always very accurate. And human's ability to forecast is pretty low actually. You can watch the TED series by Dan Ariely or read The Black Swan to learn more about that.

I also used to pay off my credit cards in full every month. I am also in a good financial position. I decided to try the Dave Ramsey cash-only method for a full quarter of spending to see if there was any difference. And, quite to my surprise, when I went cash-only, I spent significantly less every single month of the three month period. Averaging about 22% less over the three months in totality. And, without a drop in lifestyle.

Going cash only made me much more deliberate in how I spent my money. For example, grocery shopping with only cash create two specific differences. One, coupons became much more important..no need to leave any unnecessary cash on the table, and two, I no longer threw a couple of impulse purchases into my cart every single shopping trip. If it wasn't on the list, it didn't go into the cart. And the savings was immense. $3 here, $4 there really adds up without even trying. Going cash only made me focus on what I really wanted, what I really valued. it is a great way to identify waste very quickly.

[Bethany]

Tim, that's not true: Dave's website wants you to use a debit card for purchases, not credit. I haven't tried using a credit card, so maybe it would work, but he certainly isn't asking for people to buy his stuff on credit.

[FMF]

Sashie --

Let's say I went into the hardware store to look for a bolt and noticed the lawnmowers. See what I mean?

Regarding the restaurant, I do have the money and it is budgeted, I just don't have the cash with me. Why not? Let's say I don't carry much cash, I just lost it, I'm coming from the gym and don't have room for it in shorts -- whatever the reason is, there are times people don't have the cash.

I'm glad the system is working for you, but it's not worth the "cost" to me...

[M Gardner]

Of course Dave Ramsey is happy to allow you to purchase HIS PRODUCTS with a credit card!

----------------------------

Wrong you are!! If you read his website, he does NOT accept credit cards, only debit cards and ACH payments. He says it would be hypocritical for him to accept credit cards after railing against them.

As to the other things comments made in the article, Dave says that personal finance is "80% behavior and only 20% head knowledge". For example, when you purchase that lawnmower for $150 and you lay out a $100 and a $50, there is that moment when your brain says "Wow, that's real cash I'm using". With plastic, that moment either doesn't occur or is subdued. In other words, using cash is more emotional, than using plastic.

[Dar]

Sorry, but I have to agree with Dave. It's too easy to be tempted into purchasing Stuff when you have a credit card in your wallet and not enough cash.

It's fine if you have the discipline and can fight the temptation, but for the bulk of people out there I feel Dave's advice is correct. After all, it's "personal" finance, and each person's personal beliefs, strengths, temptations, and weaknesses all contribute to what each person's financial situation is today. If if were all as straight forward as simple math, every one of us would be sitting pretty and Dave, Suzie Orman, and the like would be unheard of.

[Andy]

Grocery shopping is probably the most likely place where I might spend more because I use my credit card instead of cash. A smart shopper may buy more than one month's worth of a certain item because it happens to be a great deal at that time and they know it will be in future budgets as well.

However, I have somewhat unintentionally moved to an envelope type system for grocery shopping anyway. The reason is because I buy most of my groceries at Sams Club. I can't use my cash-back Visa there, so I go to Wal-Mart and buy a gift-card for the amount I have budgeted. There usually isn't any reason for me to buy groceries anywhere other than Sam's or Wal-Mart so it works out for me.

[jim]

I think this is an area where it really depends on the individual.

Some people spend with credit cards like its play money. So there is definitely some validity to the idea that using credit cards causes increased spending. But not everyone is alike in this. There are definitely people who are not compelled to spend more with credit cards. You can't declare that everyone reacts the same when using credit vs. cash. The "numerous" studies in question are a bit questionable in my opinion. Can anyone show me the Dunn & Bradstreet study that Ramsey quotes? If those studies are scientifically valid then at most they show average behavior which doesn't mean it applies to everyone.

Ramsey makes generalized declarations that *everyone* who spends with a credit card WILL spend more. That is simply not true.

[Mary Kate]

Even though we use credit cards for most purchases I suspect that we would spend less if we used cash. But we live well below our means, have no debt, have ample savings for emergencies and retirement, and just don't sweat it. I think of using the credit card as allowing some discretionary spending that we don't plan, but can well afford.

I think there are a lot of good points being made. It really depends where you are coming from. If we were having trouble I would definitely try using cash (and envelopes and a budget).

[Budgeting in the Fun Stuff]

I am one of the 40% that pays off my card every month. I spend less than I would if I used cash since the balance stares me in the face. I couldn't imagine switching to cash since I keep up with our budget by typing in every expense from our credit cards.

[Troy]

I think the question is a matter of perspective.

How much of your life do you want to finance. Like it or not, when you strip away all of the marketing ploy all of the pros and cons or benefits, rewards, a Credit Card is a loan. It may be short term, and there may not be interest due, but it is still a loan.

How much do you want to borrow. And why. I suppose it is possible to actually finance your entire financial life. How neat.

These questions seem to be rarely asked. The focus is on convience, or rewards, or points, or security, or other things. Why is the focus on that. And whose idea is it to focus on everything other than what it really is in it's bare state.

I mean it stares you right in your face with the name...CREDIT card. First word. Credit.

Why finace gas. Or food. Or a hamburger.

Because it is easier? Safer? Better? Simpler?

First, no one "buys" anything with a credit card. They mortgage it. You purchase an item with borrowed money. The fact you have the cash available somewhere else is immaterial.

Ask a 5 year old and they will tell you the real answer. If you want something you buy it. How. You pull out your money. Where did that money come from. Your piggy bank. It really is that simple. Somewhere along the road to adulthood we are convinced however that this time tested process is too cumbersome. That borrowing and paying back later is the way. Just look at all the rewards available.

It really is the "I'll pay for it later" mentality. Every reason for using a credit card except for credit can be debunked. Every one..including the revered rewards. People generally spend somewhere between 2-15% more with a card than with cash to chase a 2% reward. (Journal of Consumer Research)(McDonalds)(Anyone with common Sense)

Regarding cash vs plastic...the argumet is about tangiblity. Some people don't understand that. OK. A picture of a car vs standing in front of that same car.
A picture of your spouse vs looking right at them.

Tangible is real and it makes a massive difference. Especially with an intangible like finances.

Credit cards are not bad. They are pices of plastic with a loan contract. But the irreverence they create is.

[Jamie]

I've been following Dave for more than 6 years and I totally agree with you. He and I are also at odds on credit card usage. I use mine for 95% of my purchases. I use an envelope system, so budget for my purchases, pay off the card in full at the end of the billing period and get a cash back reward of about $500/year. I don't spend more just because I use a card. maybe that'd be true if I was a big "shopper" which I'm not. I go when I need something, kill it, and go home. I once thought the cash thing was legitimate and tried it when we bought our car. The salesman laughed and said they'd rather we used their financing as they make more money from the lender than they'd save by us using cash. I've tried it with furniture purchases and, again, the sales person laughed and said it didn't matter how we paid. They get their money either way. So I used their same-as-cash and enjoyed 0% interest for 18 months while I earned (next to no) interest on the money in my savings account. On hindsight, I should've used the card and earned the cash back.

[Lulu]

I have actually found that I get discounts for using my credit card on small items instead....but I guess I am just lucky that way.

The most recent one is trying to buy a local newspaper which I thought was $3 but it turned out to be $0.75. I handed over my card and the person said it was not worth to them to run the card because of the fees so they gave me the paper for free.

Also, when I buy things at CVS and combine Extra bucks and coupons if the total comes to less than $0.10 they give it to me for free.

I have never seen the case where I get a discount for cash except at the gas station. I get cash back on the card for buying gas which is more than the cash discount so I always use my card to get gas.

[Budgeting in the Fun Stuff]

Troy, how is having the money on hand when you use a credit card immaterial? If you have the cash to pay the bill, that seems important to me.

Also, if you have close control of your spending, you don't spend any more on a credit card than when you use cash.

For example, I was going to spend $63 at Sam's Club on Saturday whether or not I paid with cash or my Discover card. I needed 1 package of steaks (3 lbs), 1 package of pork chops (5 lbs), 1 package of boneless chicken breasts (5 lbs), 32 oz of fresh ravioli, 10 lbs of potatoes, 5 lbs of fresh carrots, 5 lbs of frozen green beans, and 24 frozen mini corn on the cobs. Cash or not, those items were on my list and in my cart.

I used my Discover and will get at least $0.63 back. There were no discounts for using cash.

How would using cash have been better? I already have the money set aside for the card expenses and now I have a record I can use to budget.

Honestly, if you'll spend more using a credit card, DON'T USE CREDIT. If you are a list person that budgets everything anyway, what's the harm of getting cash back from credit cards?

I only use my debit card at Spec's for their 5% discount and I use cash for private party sales (souvenirs or Craigslist). Otherwise, it seems unnecessary to me.

[Troy]

Budgeting:

It is immaterial because using a CC is still a loan. Whether you have the money, or not, you are not using it at the time of purchase. You are using someone elses.

That is what I am talking about with perspective. I don't have CC, and have never had CC debt. I understand the reasons and the perks and rewards, but to me it seems silly.

I don't find it convienent to borrow money for things I can pay for with a debit card or cash. I don't need a short term loan for chips and a drink.

[MikeS]

Troy, it sounds like you just have an issue with any type of loan, no matter the purpose. I suppose then that people should not take out a mortgage or any other type of loan. That's a very conservative view to hold and there's nothing wrong with that. I do believe though that one would miss out on advantages by not using benefits that certain loans offer.

I'm going to stick to getting my rewards. I don't care if it's a loan that I don't need to take. It is essentially someone paying me to do something I was already planning on doing. If you don't want to get paid, that's your prerogative.

[Troy]

MikeS

Massive difference between borrowing for a home or an education vs a steak.

That is because generally in that situation you actually need a loan and don't have the cash available. And the loan allows the otherwise unattainable.

I am all for home loans and student loans.

[Matt Johnson]

I have an issue with the myth that credit cards and debit cards somehow have the same protection as pieces of plastic. They don't. If you get ripped off with a credit card, the money never leaves your pocket — you file a dispute with your credit card company and don't have to worry about overdrawing your checking account (or writing bad checks). This is the primary reason I prefer credit cards over debit cards.

[Eric]

I gave up arguing against Ramsey about this point because his fan"atics" just openly insult anyone who goes against his seemingly undeniable advice.