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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.