Hi, it’s Alu from the Axel-Money podcast!
Among my mentors, there is a strong disagreement regarding credit cards. The Ramsey clan considers them to be the devil. And I think that they have some excellent reasons to think that. Traditional investors and consumers utilize credit cards quite a bit, meaning that they must believe that they are valuable in some way. They are also absolutely correct. Are credit cards good or bad? Are they an asset or a liability? Like many tools, from guns to cars, they are both; it all depends how responsibly you use them.
I have been listening to the Ramsey shows for a few months now, and I have converted to his cult (yes, it is a cult, and we are all fine with that) around 85% since reading his magnum opus. In his book and on the show, Ramsey and his co-hosts often condemn credit cards extremely harshly, seriously comparing them to the most terrible things in this world. Most often, Ramsey, Hogan, and the others discuss the insanely high interest rates of around 18 to 24 percent that generally accompany credit cards.
Being the genius that I am, I kept telling myself that the interest rate on credit cards is irrelevant if you pay it off in full (on auto-pay, like I do) every month. I have actually never paid a nickel of interest on any credit cards in my life. In fact, geniuses like me actually utilize credit cards so effectively that they are net assets for us, because I have earned and enjoyed around $1,500 worth of free travel with my wife by using credit card points. I turned on my podcast, heard old Dave disparage credit cards, and mention how much they hurt people who get trapped in massive debt because of them. I smile to myself and think that I am simply more disciplined than the average fool. To me, credit cards add value and cost nothing; My credit cards are assets. Or are they?
Finally a fellow genius called into the Ramsey show and mentioned this exact issue to Dave. It turns out the old hick was well aware that those who pay their credit cards off each month have an effective interest rate of 0%. Ramsey acknowledged this simple fact. And then he dropped a knowledge-bomb on the young man, anyway:
“I don’t care if you never pay interest. When people shop with a credit card, they spend much more than they do when they shop with cash. And the studies confirm this. In fact, the ‘pain’ part of your brain is activated when you spend or give up something of value, such as cash. Researchers found that this pain signal was substantially less active when shoppers used debit cards. And there was no pain when spending money on credit cards. This is why people spend much more when they use credit cards to make purchases. The two massive disconnections to real money – debt paid in a month and the plastic form of the card – cause human brains to literally not consider spending money on a credit card to be a meaningful sacrifice.”, is pretty much what Dave Ramsey told the caller.
This argument is the one that got me. It made me realize what a fool I had been. Thinking back to the times I used credit cards for purchases (around 95% of the time), I spent freely without a care in the world. When I use cash, I tend to spend much less. Being a self-proclaimed expert in psychology, I immediately understood the neuropsychology behind this concept. And that’s why I’m proud to say that I now use credit cards for only around 94% of my purchases. Progress!
Another excellent argument that Ramsey makes is that credit card companies/banks spend tremendous sums of money marketing credit cards. Stores like Macy’s might focus more on selling customers on their credit cards than on their actual products. If idiotic consumers think that they are outsmarting the people who are literally the smartest financial, marketing, and analytics minds in the world, they are fools.
I do get 1-2% back from credit card purchases in the form of points, but if I buy 100% more than I need to due to the ‘plastic effect’, the nasty little cards are actually net liabilities to me, technically speaking.
Should everyone cut up their credit cards like Ramsey recommends?
Unless they are disciplined enough to seriously only use credit cards for purchases that they are 100% sure they must buy or would buy with cash anyway. While Team Ramsey claims that nobody ‘got rich’ from credit card points, it is undeniable that 1-2% of $50,000 per year is not meaningless.
As for Ramsey’s strict no-debt rule, I am still conflicted. I hate debt. I always have. That said, current inflation of the US dollar/federal reserve notes (much higher than 2% annually) and record low interest rates of around 2% for some home and car loans complicate matters. If I have an extra $100 each month, Ramsey would have me put it towards my car loan, which has an interest rate of around 4% annually. If I did that, I would pay off my car loan a bit early, and I would save a few dollars on interest over the life of the loan. If I bought gold or silver with that extra $100 each month, I would be putting my money to work in a much more effective way, mathematically speaking. The dollar plummets in value by around 8% each year, meaning that in the final year of my car loan, my monthly payment of $300 will be a tiny payment, because inflation will cause $300 to be a small amount of money in a few years. So, it would benefit me to pay my loan off on schedule, not early. The extra money could be moved into a currency or asset that retains or increases in value. If I have $1,800 right now, I could save it and watch it lose value, I could put it towards the car, or I could buy an ounce of gold. In a year, that same ounce of gold might be worth $3,000. Then I could sell the gold and pay off the remaining balance on my car loan. The same could be said for any investment, though you would likely encounter more risk by exposing yourself to the stock market.
All in all, I think that diversification is extremely important. Work hard, save a lot, pay off debt as soon as you reasonably can, invest in currencies, including crypto and precious metals, and invest in yourself and your own skills.
My final point would really piss off my new virtual financial mentor. I think that having a credit card might prove valuable in extreme emergencies in which your emergency fund is not enough or cannot be accessed. I could be convinced that I am wrong, though. It’s happened before!