Credit Cards are Not Evil

by Kevin on January 10, 2008

Many of you will disagree with this sentiment, but hear me out.

Credit card companies do not generally have your best interests in mind. They want you to charge as much as possible, and take your time paying off the balance. A $10,000 credit card balance, at a 14% interest rate, with a $125/month payment will take you 229 months to pay off. That is more than 19 years. Oof!

As cash hungry as those credit card companies are, they do not pay evil henchmen to run around the United States and hold guns to consumers’ heads. Debt that is racked up on credit cards is voluntary. You picked up the card. You went to the store. You swiped it at the register. Take some personal responsibility.

Granted, the card companies try to appeal to every one of your impulses to get you to use the card. “It’s easy!” “You can pay it off later!” “Come on, it’s just this one time…” Mailer after mailer ends up at your house, full of pre-approved offers. They see it as trying to win your business. We all know they are trying to entice you into a never ending cycle.

Despite all of this, I love our two credit cards. Here’s why.

  • A credit card is a tool. Other controversial items — guns, for example — have the same stigma. The credit card does not charge purchases on its own. A gun does not pull the trigger. Both are risky tools. With risk, comes responsibility. Used wisely, credit cards are a beneficial tool to have in your wallet. (For the record, I am not a fan of guns, and do not own one. I know the risk, and have made the choice against it. Credit cards can be viewed the same way. Nor am I saying they are on the same level — just making a comparison here.)
  • Rewards. From August 2006 to July 2007, I earned $432 in cash back rewards with my American Express Blue Cash card. Some will argue that the risk is not worth the reward; I’ll tackle this in a future post. Yet, I’m not going to argue when I earn $400+ for simply paying my bills as I would normally.
  • Purchase Protection. There are always catches, but for the most part anything I charge on my AMEX is covered. If someone on eBay rips me off, I don’t pay a dime. I use the card heavily (i.e. I make them a lot of money), so most small charges can simply become a write off for the card company. I have only had to use this protection once when I ordered a gift for my Mom from an online store that never shipped it out.
  • No interest paid. We pay off the statement balance at the end of every month. Result? I’ve never paid interest on my cards. We use the cards just like they were cash.
  • I don’t spend more than I would otherwise. This is the real kicker, even for people who pay off the balance at the end of every month. The common rant against credit cards is you typically charge 12-18% more than you would if you paid cash. We simply don’t do this thanks to our budget. More on budgeting later, but if you truly stick to the budget it is not possible for you to spend more than you would otherwise.
  • One Payment. Well, a handful of payments. As I mentioned, we use our credit cards for almost everything including utilities, car and life insurance, groceries, and eating out. Rather than having to write a lot of checks during the month, all of those payments get bundled into two cards.
  • Safer than a debit card. Some (Dave Ramsey) argue that debit cards are better than credit cards because you can’t spend more than what is in your account. This is true. If you simply can’t control your spending, don’t get a credit card. If you can, the credit card is a better option. If your debit card is stolen, all of your cash is at risk. You may get it back, but it can take a while for the bank to get everything sorted. If your credit card is stolen, your risk is limited to whatever stipulation is in your agreement. I think a common agreement is you pay nothing after the first $50 of unauthorized charges.
  • Delayed Payment. This is a heavily marketed “benefit” of credit cards to consumers. Charge now, get the item now, but pay later. We always have the cash on hand to pay the bill, but get to hang on to it for a while. Thanks to ING (savings and checking), we earn at least 0.25-0.33% on those purchases each month. (3% on checking/12 = 0.25, 4% on savings/12= 0.33%). It isn’t much, but every little bit counts.

Do you use credit cards? Do you carry a balance? Do you get rewards? I am only a fan of cash back cards. Airline miles are only good on airlines. You can use cash on anything.

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Nuggie99 January 11, 2008 at 10:32 am

I pay almost everything on credit cards and pay them off. I have a cash rewards credit card and an Amazon rewards card.

I believe Dave Ramsey and others who are down on credit cards have a point. In Vegas, you might say “the House always wins.” Same with credit card companies. Those rewards come from somewhere. Visa, Chase, AmEx, etc. don’t do it out of the goodness of their heart. Eventually, you (general You, not you, Kevin) are going to miss the deadline and pay some penalties and 18% interest. Remember Dave usually deals with people who aren’t good with organization and money handling, For them, yeah, credit cards ARE bad. For the rest of us, there’s a risk, but I’m willing to take it.

Ricky February 5, 2008 at 7:25 am

I could not agree more with your stance on credit cards. My wife Tiffany and I use our credit cards for every payment we can. We pay the balance off in full and on average we earn $20 to $30 every month in cash back rewards. Like you said it is not much but I’ll take it. Especially considering I am only spending money that I would already be spending anyway. I for one ( and I am sure I am not alone on this) tend to spend more when I have cash. If there is cash in my wallet it tends to vanish and I usually can’t account for all of it at the end of the day. Tiffany is much more financially responsible than I am, and I know every credit card purchase that I make will show up on a statement at the end of the month. Knowing that I am held accountable for my purchases makes me think twice before I a make a stupid one. I am curious Kevin, what would $25 per month look like after 30 years at 12% interest? It may not sound like much on the front end but I would be willing to bet the end result might raise an eyebrow.

Ricky February 5, 2008 at 2:01 pm

Curiousity got the better of me so I had to answer my own question. $25 per month invested at 12% interest for 30 years is $81,836.78. Here’s a plan: invest your cash back and buy yourself a brand new car as a retirement present.

JimmyDaGeek March 13, 2008 at 11:42 am

I agree with all your points. I keep reading stories about how CCCs are increasing interest rates for no reason. I don’t worry about that. I have 5 cards and I have no idea what my interest rates are. I pay my cards off every month. Why so many cards? Different rewards for different purchases, plus my wife and I have our own cards with each other as an authorized user. This helps each of us keep our own credit history. When traveling, I have had one card declined and had to use another.

Most importantly, I look at my credit card as you do, an extension of my checking account. I never charge anything with the idea of paying it out. Plus I use it as emergency money instead of a check or debit card. I have an emergency fund I can use to pay for unexpected purchases on the card.

Mark @ TheLocoMono June 7, 2008 at 12:35 pm

You have some pretty good points here. Especially the part about earning money for paying it all at once and on time.

At the moment, I am using a secured credit card to help rebuild my credit score/history for future goals. Having been in trouble with unsecured credit cards in the past, I am learning a lot more now about self-restraint and more importantly, cash management.

While I am only using my secured credit card for emergency purposes, I am also learning how to use it and pay off the charges within 2 weeks of any purchase to lower the finance charges, if any.

This is helping me learn how to manage my cash flow in coordination with paying my expenses. In a way, it sounds like what I am doing is one step closer to what youa re doing with AmEx.

GHolmes September 17, 2008 at 5:13 pm

Kevin I would expect this from a Vol fan. CHEETAH. Keep your financial life simple, enjoy living on less than what you make and not juggling the credit card offers.

Kevin September 17, 2008 at 7:37 pm

@GHolmes: I’m going to ignore the punches to my Vols… but to your point, I disagree.

Credit cards make my life more simple because I pay much fewer bills thanks to auto-pay. And I am NOT in favor of juggling credit card offers. I’m assuming you mean juggling 0% balance transfer offers. That is far too risky to me and is just asking for trouble. Paying with a credit card and paying it off at the end of the month is different from that, of course.

gholmes October 1, 2008 at 12:00 pm

@ Kevin
I do agree that credit cards in themselves are not evil and they make life easier. Like your title and see you are on the right track. It is that credit cards are expensive.

Assumption –
Charge all expenses and pay bill off during grace period. Never make a mistake in paying bills
Charge card is a 2% rebate card.
75,000 Expenses charged to credit card
x 0.02
1,500 rebate

Merchant – my average merchant fee 3.29%, I hope to make 12% rate of return
75,000 credit card sales
x 0.0329
2,467.50 merchant fees to visa/mc

x 1.12
2,763.60 fees with cost of capital added

967.50 Bank makes for a loan of less than 30 days
296.10 merchant makes 12% internal rate of return

(1,263.60)credit card users loose in purchase power.

Kevin October 3, 2008 at 9:39 pm

@GHolmes: Again, you are ignoring that everyone pays the higher cost regardless of being a credit card user or not. So why not earn rewards? I think that helps build the case for credit cards on an individual basis, even if they point toward the negative for the group/society basis

GHolmes October 4, 2008 at 8:47 am

“why not earn rewards?” is a differerent question. I wanted to bring attention that credit cards arent free as I been reading lately. Dont be shocked if a merchant doesnt ask for ID because we are still earning money just passing the cost on. Dont be surprised how easy it is for folks to get credit cards because banks are making money.

You have a great title for the blog which I agree with Credit Cards are not evil. Credit cards are just a tool. What is the true cost to use of them?

Folks get up in arms when gas goes up 25 cents a gallon but nothing is said when banks add another fee, shorten the grace period or charge the merchant a 1/4 % more.

eric_wan September 8, 2009 at 9:13 am

Rewards are a gimmick, and you’re just inviting more risk into your life. I know you say it’s simpler/easier, but the fact is you DO juggle some mental energy making sure you don’t get bit by the snake.

And, with credit and debit cards, people tend to spend more like you said—why do you think vending machines take plastic now? Mcdonalds?—-plastic enables impulse. And if you spend more generically how much in ‘rewards’ are you really getting back? You and a handful of others are losers to the industry so expect more fees and discouragements to game the system like you’re attempting to do.

Yeah, credit cards aren’t evil, but predatory practices by these amoral companies?—I don’t know, how about “not very nice”.

and the comment about “cash just disappearing”—that’s not a credit vs. cash problem, that’s a “I have no budget and just spend whatever” problem. You said: “but if you truly stick to the budget it is not possible for you to spend more than you would otherwise”…well, sure, but how many people actually do a budget and follow it? not in theory–in practice. The answer is “very few”—so in this environment, why is it hard to see that credit cards are just inviting risk/debt into your life? You might be the exception, but please consider the audience who’s reading this—they very likely don’t have your discipline or control—and that’s EXACTLY what the card companies are counting on.

It’s like I wouldn’t invite my alcoholic friend out to the bar with me! ;]. I don’t use credit cards as I do see a cost—a ‘hassle factor’ if you will. If you are a math nut and actually do/follow a budget, I’d just say “good luck”—times they are a’changin!—but if you don’t have a budget/follow it religiously, then you’re just asking for trouble. The house does always win.

Finance February 8, 2010 at 4:01 am

Credit cards make my life more simple because I pay much fewer bills thanks to auto-pay. And I am NOT in favor of juggling credit card offers. I’m assuming you mean juggling 0% balance transfer offers. That is far too risky to me and is just asking for trouble. Paying with a credit card and paying it off at the end of the month is different from that, of course.

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