Getting a credit card can sometimes feel like free money. Banks offer lines of credit to almost anyone, giving you the ability to spend $500, $1000, or even $10,000 before you get your next paycheck. You have two schools of thought when it comes to having a line of credit. You have the Dave Ramsey way of thinking that all debt is bad, and then you have the Graham Stephan way of thinking where, if you are responsible, you should take advantage of credit cards and other lines of credit to earn more money.
The Case FOR Credit Cards
Graham Stephan and Ask Sebi are two popular YouTubers that promote the use of credit cards. Their argument is that if you are responsible enough to pay your credit card bills in full each month, you should take advantage of the points and cash-back offered by many credit cards.
One of the popular credit cards they promote is the high annual fee Chase Sapphire credit card. I personally prefer the no annual fee Chase Freedom Flex where you get 5% cash back or points on rotating categories, 5% on travel, 3% on pharmacies and dining, and 1% on everything else. They also offer 10 to 30 day temporary cash-back on individual companies. Examples include 10% back on DoorDash or Starbucks. Another card I like to use is the Discover It card offering 5% on rotating categories and 1% on everything else. For those just starting out with no credit history, Chime has a great starter credit card.
Benefits that come along with certain credit cards typically include:
- A percentage cash-back that can go towards statement credit, an amazon purchase, or a check to your bank account.
- Points that can be used as cash-back or discounts on other products.
- Insurances for your cell phone or travel.
- Travel lounge access
- TSA Flight Pre-check
- Discounts on travel with airlines, hotels, and car rental agencies.
- Free currency exchange or no charges for use in other countries
- Cash advances if you need cash in a hurry.
- Purchase Resolution if you were accidentally or wrongly charged on your credit card.
In addition to these benefits, credit cards automatically give you a credit history. With a good credit history, you get a large amount of borrowing power. This power allows you to purchase properties at a greater price than someone with a poor credit history seeking a student loan or mortgage. To get a good credit history, you need to hold credit cards for long periods of time without cancelling them. You need to pay all of your bills on time and in full. You need to limit your credit card utilization to less than 10%. For example, your total credit card limits can be $25,000 but you should never exceed $2,500 per month charged on your credit cards.
A credit card is a line of credit, just like a HELOC. I use a HELOC, or Home Equity Line of Credit, to pay off my mortgage loan debt. Click here to learn more about how I saved over $150,000 in mortgage interest and shaved off over 20 years in just 2 years of using my velocity banking strategy.
YouTuber Andre Jikh considered taking out a HELOC on his home so that he can invest the money in the stock market. The HELOC charges around 4% while the stock market makes an average of 7%, allowing him to pocket a 3% profit. That is better than any savings account could offer.
The Case AGAINST Credit Cards
The Ramsey Show over at Ramsey Solutions, owned by Dave Ramsey, is an organization dedicated to getting American’s out of debt and on the path to becoming millionaires. They teach the concepts of the 7 Baby Steps and Debt Snowball, both of which my sister is using to pay off her over $150,000 in medical student loans. These are proven concepts that work for “most” American’s.
The data provided by Ramsey Solutions includes the psychology of people. If you use a credit card or even a debit card to buy groceries, you will spend more than if you only had cash on hand. If your wallet has nothing but cash, you have a limit on what you can buy. You are more aware of how much money you have at any given time and you are mentally tracking your expenses. If you use a credit card, your mind does not think about limits. You will mindlessly buy whatever you want and spend more.
Human’s find it easy to use a credit card. It just takes a quick swipe or tap to buy something. Using cash takes more time and it is not very hygienic. People are lazy. We don’t want to do math and count our cash when purchasing something. No one wants to carry change around. We want the security and convenience that a credit card provides. This is both helpful and dangerous for our finances. This is the point that Dave Ramsey is trying to make. You will spend more money if you use a credit card, period.
Credit cards can also be dangerous because of their high interest rates. If you miss a few payments, make minimum payments, or make late payments, the fees will add up quickly and you will get to a point where you can no longer make the minimum credit card payment. The interest will keep ballooning and the balance will go up faster than you can pay it off. Thousands of people fall into this trap each day. Unfortunately, it is very common.
My Opinion
I agree with both schools of thought. I am fully aware that using a credit card makes me spend more money. This is the price I choose to pay for the convenience, time savings, and security of a credit card. I always make my credit card payments in full each month. Since I started using credit cards nearly 17 years ago, I have never paid any credit card interest, annual fees, or late fees. I have also kept my credit utilization under 10% and my credit score over 780.
I also enjoy the quality of life that comes with responsibly using a credit card. If I shopped everywhere with cash, there would be plenty of things I would have wanted to buy, but couldn’t. For most American’s, I agree credit cards are bad. Unless you regularly budget, monitor your finances, live comfortably, and create yearly financial goals for yourself, you should not own a credit card.
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