Sunday, December 10, 2006

Don't use Credit Cards - or should I?

I have a dilemma.

For over a year, I scrimped, sacrificed, and did without in order to pay off my credit card debt. I am now debt free.

The next logical step is to cut up all my credit cards (I've already cut up most of them), and stop using credit, right?

Well, this is where I have the dilemma. I have 2 credit cards that give cash back, and I'm torn about whether I should continue to use them for everyday purchases.

On the one hand it seems silly to NOT get the cash back on items I am going to buy anyway. Why not get a discount on necessities, if you can? Isn't that the frugal mantra?

Isn't the definition of frugal money management paying as little money as possible to meet your needs?

When I used these cards, I deducted the charges in my check register and always paid the balance off by (or before) it's due date. So, it's not like I was charging purchases, just making the minimum payment, and incurring interest. I spent quite a bit of time making sure the charges were accurate, and paid on time.

On the other hand, my brain repeats the mantra "credit cards are dangerous, don't use them." "Use cash," my brain (and Dave Ramsey) insists.

Now, this is a bit narrow-minded, I admit. I do tend to have a one-track mind once I make a decision about something. But, there is a valid point here.

If you never use a credit card, you can never get into credit card debt. If you don't use credit cards, there is no need to worry about a mistake or oversight, no trying to jump through hoops to meet the criteria for the cash back (only certain stores qualify), no concerns about the due date changing from month to month, no temptation to charge something you don't have the money for (but it's a really great deal and you can save a lot money buying it now).

In short, if you don't charge it, you don't have to fight an entire industry that is working it's hardest to get interest and fees from you. And, you don't have to fight you-as-your-worst-enemy syndrome.

So, I'm stuck. I actually called a credit card company to re-issue cards (I had cut them up) for my account. Now, I'm wondering if I made the correct decision.

What do you think? Is the hassle and risk of using a credit card worth the cash back offer?


Debbie said...

It depends on your psychology. All else being equal, it's better to get the cash back because you pay 1% less.

But is all else equal? (For me, I think it is.)

If credit cards don't feel like real money, but cash does, and so you spend less with cash, you'd probably save more than 1% by sticking with cash. (I know I'm paying it off every month and subtract it out of a register as if I had written a check, so it feels just as bad to me either way.)

If you're spending more than you otherwise would because you know you're getting 1% back, then you're probably spending more than you're saving. (I sometimes think this, then I calculate how much 1% is and remind myself that it's nothing.)

If you ever miss a payment deadline, those fees are huge and even a single mistake can cost you many months of savings. And it's no good for your credit rating either. (Urg. I did this. Twice! I have a better system now where at the end of each month I double-check that I have paid all my bills for the month.)

Does that 1% get spent in some way that you wouldn't otherwise be spending it? (Mine goes directly into a savings account.)

Having a credit card in addition to other payment methods gives you a little more flexibility, too. But then if you lose your purse or it gets stolen, that's one more thing you have to report.

And keeping up with credit card payments and keeping your balance low can help with your credit rating.

I think this is one of the few areas in my life where I can use the math to make my decision and not worry about the psychology. But if it's not one of yours, the wise thing is to recognize how you are and act accordingly.

F_M_M said...

Excellent points, Debbie. Thank you for taking the time to post.

Credit cards do feel like real money to me as I deduct them from my check register.

It is a hassle to keep up with everything, though, so I'm thinking I'm going to use them just for the things that earn me 5% cash back like gas for the car.

Debbie said...

That sounds like a good compromise. Only deal with the hassles for 5%. You can't be bought for a mere 1%!

I always feel a little bad using a credit card because I know the business has to pay an extra fee when I do that compared to paying cash. So if I really love the retailer and the cash back is only 1%, I'll often use some other payment.


Its best to avoid credit cards.