Credit cards are everywhere these days! Chances are you’ve had at least one (I know I did!). You’re wondering if you should keep it, or possibly get another one.
But let’s talk through this first.
We had just gotten out of debt and started on baby step 3 (building our emergency fund) when an emergency came up. Our starter emergency fund couldn’t cover it, and we decided to get a credit card.
Then that one got maxed out because we weren’t diligent to pay it off. So we got another.
There we were, just finished paying off over $100,000 in debt, just to get ourselves back into it. It was a horrible, sinking feeling.
That’s why credit cards are so dangerous: it’s easy to use it and forget it, until it’s maxed out.
With all of the incentives out there, it can be tough to turn down plastic. But let me counter those incentives and hopefully talk you out of getting a credit card (or keeping the ones you have).
Incentive 1: They offer great rewards
This is the number one excuse I hear from others on why they have credit cards.
Yes, rewards do come with many of the credit cards out there today. Whether you get so many airline miles with every dollar spent, or X percentage cash back with every qualifying purchase, those rewards are out there to lure you in.
But before you go running to open another credit card based on those rewards, let’s do the math for a second.
I’ll be using a popular airline’s credit card policy for my example. This airline allows you to use points or money to book flights.
According to their website, every $1 is approximately 70 points, so a $100 fare is about 7,000 points.
Quick breakdown of the credit card:
- 2 points for every $1 spent on flights, hotel, and car rental (so basically, travel)
- 1 point for every $1 spent on everything else (I’ll be using this number, since it applies to most users for everyday stuff)
- APR is 17.74-24.74% at the time of writing, so I’ll be using 21.24% as my average
Our last piece of information needed is the average revolving credit card balance per person in America, which is about $6,438 at the time of writing this post. It’s important to know that this number includes those who pay off their credit cards monthly.
Doing a quick Excel calculation with daily compounding interest using these numbers, the monthly interest payment alone is $108.
So, for that $100 fare, you are paying about $108.
These are just using average numbers across the board. You may have less revolving credit card debt or more, or your interest rate may differ. But with how easy it is to rack up credit card debt, is it worth the risk?
Incentive 2: Helps build my credit score
I’m going to rely on my ole’ pal Dave Ramsey on this one. He talks about this so often.
The best way to improve your credit score is to get rid of it altogether.
Dave Ramsey breaks it down amazingly here, but here’s an excerpt I really like:
According to FICO, there are five things that can impact your score:
Payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), credit mix (10%)
There’s absolutely nothing about a credit score that indicates you are good at handling your finances (like balancing a checkbook or investing in mutual funds). What it really does is monitor how comfortable you are with taking on debt to pay for things over the course of your life.https://www.daveramsey.com/blog/the-number-one-way-credit-score
Ramsey recommends paying for as much as you can with cash.
What about mortgage? There’s no way I could save up and pay cash for a house!
Me neither (right now). Ramsey recommends a company that will manually underwrite your mortgage loan instead of using your credit score. Manual underwriting takes more work on the lender’s part, but does not require a credit score.
They simply look at your work history and income, and your ability to pay your bills on time. I say “simply” because that’s about all they look at, but it can be a tedious process.
Think about it this way: the credit bureaus give you a score that is partly based on your ability to pay on time. So the lender just has to take a look at your score that was already calculated to analyze your ability to pay. Manual underwriting makes them do the work themselves.
Incentive 3: What if I have an emergency?
You probably already guessed my answer here, based on the point above.
YOU PAY CASH.
This is outlined much better in How do the Baby Steps Work, but the gist is to save up enough money to take care of emergencies, if they come up.
You have a good chunk of money set aside strictly to be used for emergencies. And chances are, the amount you save is probably more money than your credit limit.
In our case, we didn’t have enough time to save up that emergency fund before an emergency came up. I pray that doesn’t happen to you too. Digging out of debt just to find yourself back in it hurts.
The bottom line
I know these incentives are attractive. I think all three of them attracted me to a credit card too.
We saw that the rewards programs aren’t as rewarding as we thought.
That there are alternatives to having a credit score boosted by debt.
And that you will have a game plan if an emergency comes up.
It can be scary and unknowing to not have a credit card. I know that because I have felt the same things. But once you see where your money is going and the havoc that plastic is having on your finances, hopefully it won’t seem quite as scary to go without it.