Is responsible credit card use possible or is it an oxymoron like “jumbo shrimp”? Dave Ramsey is adamant that responsible credit card use is impossible (I respectively disagree with that article). The majority of financial experts encourage the responsible use of credit cards.
Who should we believe: Dave or everyone else?
Credit card use is responsible when the balance is paid off each month before interest is billed.
Just over half of Americans carry a credit card balance. Does that mean it’s impossible, though?
Responsible credit card use is possible. In fact, about half of all credit card users pay off the balance monthly. Credit cards can offer convenience, identity theft protection, expanded manufacturer warranties, cashback, and more. It’s our responsibility to manage our credit card use with vision and self-control.
Caveat emptor!
Is Dave Ramsey Correct About Responsible Credit Card Use
I have had the same credit card since 1987. During that time I have never paid interest on the card. The card is used and then paid in full before the bill is received.
Banks and credit card companies are paid a transaction fee by the retailer when something is purchased. Theoretically, the bank is profitable even when my bill is paid on time. They don’t need to charge me interest but they will gladly take my contribution.
Credit card companies take a risk when extending credit. Card companies charged off in excess of $30 billion in 2020. Advances made on credit cards are unsecured loans. There is nothing for the bank to repossess in the event of non-payment.
Banks and credit card companies are not evil. Dave Ramsey is wrong about this. They provide a service, take a risk and make money in doing it. Dave does the same thing.
Margin Call is a great movie. There’s a scene where Will Emerson is brutally honest about the greed of the average consumer. Consumers often want extravagant lifestyles. The credit markets provide these unearned benefits.
When it goes south the banks get blamed. The people act like innocent victims.
Eleven Benefits For Responsible Credit Care Use
There are many credit card benefits. Here are some of my favorites.
Cash Back — Credit Card Benefit
There are dozens of cash-back credit cards available. I get cashback on my one and only credit card. The cashback I get is about $250 per year. I’m not getting rich but I’m also not complaining either.
Other credit card companies offer sizable cashback opportunities. Maybe I will take a chance on another card and give it a test drive sometime.
Extended Warranties — Credit Card Benefit
I never purchase extended warranties. Extended warranties are serious profit centers for retail stores. These offerings are rarely worth their price, though.
However, some credit cards offer extended warranties, automatically. It’s important to check the fine print on your specific card.
You’re shopping for a new laundry pair. The cost is around $2,000 (for illustration purposes). Big Box USA offers an extended warranty for $250. Your credit card company doubles the manufacturer one year warranty to two years.
It’s something to consider.
Using Other People’s Money
Your debit card is tied directly to your checking account. A credit card has no connection to your checking account.
If your debit card is compromised thieves could access your cash. Yes, you might get it back but there will be some serious pain involved.
Credit card companies fight hard for their money. Let them.
Credit Establishment Or Repair
Having good credit is vital despite what my friend Dave says. Buying a house with a zero credit score will present a unique set of challenges.
There will be times when getting an apartment or establishing utilities (without a deposit) require a satisfactory credit score.
Start with a credit card and only use it for gas. Immediately pay the balance. Why? One component of your credit score is credit availability. If your credit limit is $500 and gas costs $50 your availability is limited.
Use the card but keep the balance as close to $o as possible. Never, ever carry a balance.
Eventually, your limit will be increased. When your limit is larger and you trust yourself to be responsible simply pay it off before it’s due — in full
Airline Perqs — Credit Card Benefits
Every airline offers perqs now. If you travel often but not enough to get status an airline’s credit card could help. I prefer to board earlier than later.
The airline I use primarily allows flyers with their card to board early. They also comp checked bags which can quickly add up and get expensive.
Frequent flyer miles are credited with purchases made. In-flight purchases are discounted as well.
There are typically annual fees on these credit cards, however.
Bonus Rewards
My brother has a boatload of kids. His grocery bill is ridiculous when compared to mine. He uses a credit card that gives extra rewards for using his credit card at grocery stores.
My rinky-dink credit card gives me 3x for restaurants and 2x for gas stations. My debit card only gives 1x.
Don’t use your card just to get the bonus. If they’re being offered why not take them up on it?
Purchase Protection
Credit card companies are awesome when dealing with legitimate purchase disputes. If you’ve experienced shoddy service get your credit card company involved.
There are instances when credit card companies can and will withhold payments in order to resolve issues.
Accounts Payable
I have a friend, an already wealthy friend, who used his credit card for as many purchases as possible for an entire year. He set up the card to pay before the due date for the full amount of the balance.
Instead of having 20-30 debit card transactions on his bank statement, he whittled it down to one. He took advantage of terms.
Plus he earned nearly $2,000 in cashback from his credit card company.
Convenience
My friend Dave states that a credit card is not required to rent a car or book a hotel. It sure is challenging though.
Often these companies will put a hold on your funds. This will result in your own money not being available. If you’re wealthy that is not a big deal. When things are already tight this inconvenience could be catastrophic.
There is a cost for convenience.
Intro Offers
Intro offers are back. There are many financial institutions offering them.
Some are cash offers. If you spend $1,000 in the first three months they will you $200. Airlines often offer a bucket of airline miles. Spend $3,500 in the first three months and get 50,000 miles.
Read the fine print and be as wise as a serpent.
Small Business
It’s common to receive 30-day terms on business-to-business transactions. However, many accounts receivable teams now require payment in advance or hard collateral to secure the loan. A way around that is by paying with a credit card.
If a company allows credit card payments it should be considered. The grace period will provide some breathing room.
Imagine that you’re a caterer. You need to purchase food for the event. Payment for services is made on the day of the event. Not having to prepay for the food should be helpful.
I know of many retailers who have earned hundreds of thousands of dollars in cashback from their credit card providers.
When Not To Use Credit Cards
If you’re unable to pay off the card during the billing cycle then you should pass on using plastic.
Some people tend to overspend when using a credit card. There’s always that one guy who gives the bartender his credit card and goes nuts. Don’t be that guy.
Ask for cash discounts on large purchases. Retailer’s credit card transaction fees. Perhaps they will share the discount with you.
If your card provides 1% cashback and your HVAC provider offers a 3% discount consider taking it. The math works. You lose some of the other protections, though.
Credit Cards — Blessing Or Cursing
There are dozens of credit card benefits. There are fewer downsides but they can be magnified.
Credit card use, like eating, requires disciple and self-control. If you are unable to control your spending then perhaps avoiding credit cards is best for you.
If you are able to operate with discipline and self-control then enjoy all of the benefits offered by credit card use.
I dare you to profit!