Interesting viewpoint on credit cards

[purplesky]

Like most (all?) people on the forum we use credit cards extensively since this being the 21st century it'd be kind of hard to get along without them, but we pay them off in full every month so we don't pay cc interest. Last night I stumbled across this Dave Ramsey rant (he calls it that himself) that even if you pay off the cc every month you'll still spend more than if you pay cash. I'm not so sure, in part because we are very much aware of how much we spend and on what because we track it carefully in spreadsheets and Quicken.

Ramsey holds that if you have to lay down $100 bills at the grocery store your brain says "Ouch!" and that will make you spend less. He maintains that the same thing does not happen with plastic.

But when I use plastic I know that within a month at most my bank account is going to be drained by whatever $$ number is on the cc receipt and in my case at least, my brain still says "Ouch!"

What say you?

The video is only 6:37 so not too long.

Dave Ramsey never mentions the Fidelity or Costco credit cards because he knows they are a great deal.

Dave Ramsey always uses the same old airline miles credit card example of how people spend big money with credit cards to get airline miles. Sure.


Why would I use cash if Fidelity Visa is going to help me fund my Roth IRA?

I lose money if I pay cash. No I don't spend more using a credit card because I pay for purchases as soon as they post and making a current balance payment is available.

Dave Ramsey also thinks a 0 credit score is a good thing. Sure Dave.

Clark Howard definitely has a more realistic view on credit card use.

 

[RobbieB]

A zero credit score? How is that even possible?

 

[purplesky]

A zero credit score? How is that even possible?

Apparently if you don't use any credit and close all accounts your FICO score will eventually go to zero.

Dave Ramsey constantly reminds his audience that he is a multi-millionaire and that he has a zero credit score.

Dave Ramsey tells his audience that he cannot rent an apartment because he has no credit score. BUT he is so rich that he can buy the apartment complex.

So the FICO score system according to Dave Ramsey just sucks.

But how is a landlord suppose to screen potential renters Dave?

And Dave Ramsey supposedly owns a huge amount of rental Real estate in the Nashville area.

I am guessing Dave Ramsey must do credit score checks for his potential renters.

 

[gar1092]

I don't know if there was a formal study on the matter but the casinos can't be wrong. People pluck down plastic chips quicker than paper money and they know it.

 

[jazz4cash]

Not a fan of Ramsey because of his one size fits all advice. Maybe appropriate for his audience but he doesn't put any disclaimers on his advice. It took me awhile to wrap my head around using a cash back card for EVERYTHING to accumulate rewards. My minimum is $5, sometimes less if it's a hassle to pull cash out for a coffee or whatever. I get daily updates on my spending so I'll take the other side of the argument. Seeing the daily total has the effect of slowing my rate of spending, especially when the end of the billing cycle is approaching and I know I'll get a free loan for 30 days if I postpone a discretionary purchase. More to the point it makes no difference if you spend more if you can afford it.

 

[meierlde]

So then are debit cards different that credit cards or did he not manage to distinguish them? Also is paying by check (all be it in some places old fashioned) the same as a credit card. (I do see a lot of checks written in the grocery store).

 

[purplesky]

I don't know if there was a formal study on the matter but the casinos can't be wrong. People pluck down plastic chips quicker than paper money and they know it.

Its a good thing Costco and Amazon are not Casinos.

 

[JDARNELL]

I did an experiment for about 6 months of using cash vs credit card. Using cash I spent 23% less than when I used cards. It was interesting. Today we use his every dollar app to categorize everything we spend. I think it has about the same affect as paying with cash for us. Its a good exercise and we really don't watch the total amount of what we spend from a budgeting amount overall. Just data collection I guess.

 

[jollystomper]

Walt, I think Dave may be correct with respect to his audience. Those of us on this forum are a far cry from the typical folks he's trying to reach, so I'm in the same "ouch" boat as you. No matter what means you use to spend it, the money comes out of your account just the same.

I agree with this. His audience is not those, like many on this forum, who practice fiscal discipline, are not in debt, LBYM, etc. If you listen to the folks who call in to his show and ask for his advice, you would realize that the last thing they need is to be tempted with "I'll get a credit card and I promise I'll pay it off in full every month". Most of these folks need to be figuratively smacked in the face with harsh financial realities.

Because this advice does not apply to me does not necessarily mean, given how the average American deals with debt, that it will not apply to many other people.

 

[purplesky]

So then are debit cards different that credit cards or did he not manage to distinguish them? Also is paying by check (all be it in some places old fashioned) the same as a credit card. (I do see a lot of checks written in the grocery store).

Dave Ramsey always claims that debit cards offer the same theft protections as credit cards.
Clark Howard disagrees.

Dave Ramsey always tells people that they can rent a car with a debit card. Sure Dave. Good luck with that.

I think checks are processed now immediately at the purchase point just like a debit card transaction.
Which is nice if you write checks.

I really don't know why anyone would use a debit card for transactions in 2018 with so many banks offering cash back now on credit cards.

 

[43210]

"Dave Ramsey says that you can withdraw 8% per year from your portfolio in retirement based on a 12% rate of return and 4% inflation."

 

[jollystomper]

Second, I know that I spend more using plastic than cash... and I would bet that a good number of people here do the same... (not to mention my DW who will spend no matter what form it is in).... you have to go get that cash on a regular basis and it will make you think a bit more when you are buying stuff... and if you do not have enough money you cannot spend it, but with plastic it is very easy to buy and pay it off at the end of the month... so little things are bought that add up over the month...

A little personal anecdote: for DW's 60th birthday one of the gifts I gave her was $600 in cash, to spend however she wanted. She had never had that much in cash at one time for herself. Months later... she had not spent any of it. She found it much more difficult to part with the cash that if I have told her to charge that amount on a credit card. She has put it into her bank account.

 

[purplesky]

"Dave Ramsey says that you can withdraw 8% per year from your portfolio in retirement based on a 12% rate of return and 4% inflation."

Dave Ramsey is just a financial entertainer but I don't get how he is able to give so much terrible specific investment advice to his audience. Without some type of disclaimer.

He admits all the time he just makes stuff up.

Its funny Dave Ramsey just completely avoids ETFs.

And don't forget about "Americas retirement expert" Chris Hogan!

 

[foxfirev5]

Like many here we use a cash back card for everything we can. I don't see any increase in spending vs the old cash only days. The cc is paid in full with funds coming from a monthly allowance in Fido cash management.
Our food purchases are the biggest item but we form a shopping list after scouring the weekly ads and deviate very little. The utility bills are likewise paid with the card. No extra splurging there either. The gas tanks in the cars only hold so much. Other shopping is so minimal it doesn't make the spreadsheet. (less than 3%). Even our vacation spending is budgeted. It's a rather high number but we stay in budget.

The credit card is just another tool with benefits. However as others have stated in various ways most of us are just wired a little different than the average Joe or Jill.

 

[Yarnstormer]

I wonder if the popularity of credit cards has increased the cost of goods overall. I’ve always said that if the average person had to pay cash for vehicles they would never cost so much, not just because they did not have the cash, but because it is a ridiculous number

 

[FUEGO]

I'm skeptical about being able to spend less on average when paying with cash vs. using a credit card. Other than simply being unable to pay for things occasionally if you have an inadequate amount of cash. Almost all my purchases where I could pay cash are gas, or Walmart/grocery store, auto shop, or restaurants.

Auto shop and gas are 2 where I get what needs done done, and skip stuff that isn't necessary. A full tank is necessary (or wasteful of time if I only fill up $20 for example). Going inside the store to pay is a hassle and MORE likely to lead to impulse purchases ("yeah, haven't had a nice high velocity BM in a while - maybe I should get a couple day old 2/$1 hotdogs with some nacho cheez on top!").

Groceries - I have a list and buy stuff if it's on sale for a good price. Total is usually $25-100. Walmart is maybe one place I could see cash-only being handy, if I had $200 for example and had to put back some stuff that was marginally necessary or lower on my want list. Though I'd just start carrying $500 or so all the time to cover unexpectedly large expenses (life is too short to waste time with multiple trips to walmart to buy stuff I want/need and sometimes it's a must have for DW and I say "okay" because divorces are super expensive I hear).

Restaurants - rarely spend more than $50 and can't see caring whether it's $25 or $50 based on plastic vs cash.

Considering I get back 2% to 15% back on every purchase I make with a credit card, I feel like I'm coming out way ahead overall even if I might occasionally overspend a tad bit somewhere. With cash I would get so numb to laying out $20s and $100s on the counter after the first month or so that I don't think it would matter. Of course we've never paid carried a balance on a CC that led to interest (except that one time we missed a payment by accident and they waived the interest and fees!!).

 

[NYEXPAT]

Strictly CASH! I do hold 2 CC that are in other peoples names that I use when travelling internationally.

 

[6miths]

I am not a Dave Ramsey fan at all, but in this case, his contention is backed up by some solid research. For example: http://www.dffrntwrld.com/wp-content/uploads/2016/06/xap143213.pdf

Monopoly Money: The Effect of Payment Coupling and Form on
Spending Behavior
Priya Raghubir
New York University
Joydeep Srivastava
University of Maryland, College Park

+1

I can honestly say that I have never heard Dave Ramsey speak though I have certainly heard of him. This isn't a novel thought that he has had, the research in the area is pretty compelling. Even if it weren't true, even with a cash back credit card one is still paying more than what the cash price would be if credit cards did not exist. My understanding is that the credit card industry lobbied long and hard to prevent 'discount for cash' being promoted by merchants. They are definitely convenient and not particularly harmful in educated hands but the profits generated by the industry suggest that most are not well educated. What a surprise.

 

[aja8888]

Strictly CASH! I do hold 2 CC that are in other peoples names that I use when travelling internationally.

How do you use cc's that are in other people's names and not get arrested? (maybe I shouldn't ask?)

 

[bobandsherry]

There's also those who have a viewpoint that if you have cash in your pocket you are more likely to spend it on things you don't need as it's convenient. Conversely if you used your CC you'd probably consider it not worth using your CC for purchase. There's also a viewpoint that once you break a larger bill, e.g. $20, you become much more willing to just waste the smaller bills as you don't think about the cost.

I guess the answer is never use cash, credit card or check for purchases, you'll then amass much more in your savings and investments. However, not really practical.

 

[davebarnes]

How do you use cc's that are in other people's names and not get arrested? (maybe I shouldn't ask?)

One of those names is: Jason Bourne.

 

[purplesky]

There's also those who have a viewpoint that if you have cash in your pocket you are more likely to spend it on things you don't need as it's convenient. Conversely if you used your CC you'd probably consider it not worth using your CC for purchase. There's also a viewpoint that once you break a larger bill, e.g. $20, you become much more willing to just waste the smaller bills as you don't think about the cost.

I guess the answer is never use cash, credit card or check for purchases, you'll then amass much more in your savings and investments. However, not really practical.

This is how I am with cash. For some reason I feel the need to spend it immediately just because its in my wallet.

But I am obsessed with paying off my credit cards as I use them and keeping a zero balance so I am very selective with CC usage.

I think the answer is to be a max saver. If you max save your income it doesn't really matter what you do with the remaining income.

 

[jazz4cash]

I'm skeptical about being able to spend less on average when paying with cash vs. using a credit card. Other than simply being unable to pay for things occasionally if you have an inadequate amount of cash. Almost all my purchases where I could pay cash are gas, or Walmart/grocery store, auto shop, or restaurants.

Auto shop and gas are 2 where I get what needs done done, and skip stuff that isn't necessary. A full tank is necessary (or wasteful of time if I only fill up $20 for example). Going inside the store to pay is a hassle and MORE likely to lead to impulse purchases ("yeah, haven't had a nice high velocity BM in a while - maybe I should get a couple day old 2/$1 hotdogs with some nacho cheez on top!").

Groceries - I have a list and buy stuff if it's on sale for a good price. Total is usually $25-100. Walmart is maybe one place I could see cash-only being handy, if I had $200 for example and had to put back some stuff that was marginally necessary or lower on my want list. Though I'd just start carrying $500 or so all the time to cover unexpectedly large expenses (life is too short to waste time with multiple trips to walmart to buy stuff I want/need and sometimes it's a must have for DW and I say "okay" because divorces are super expensive I hear).

Restaurants - rarely spend more than $50 and can't see caring whether it's $25 or $50 based on plastic vs cash.

Considering I get back 2% to 15% back on every purchase I make with a credit card, I feel like I'm coming out way ahead overall even if I might occasionally overspend a tad bit somewhere. With cash I would get so numb to laying out $20s and $100s on the counter after the first month or so that I don't think it would matter. Of course we've never paid carried a balance on a CC that led to interest (except that one time we missed a payment by accident and they waived the interest and fees!!).

Where do I sign up for the 15% cash back card?

 

[purplesky]

+1

I can honestly say that I have never heard Dave Ramsey speak though I have certainly heard of him. This isn't a novel thought that he has had, the research in the area is pretty compelling. Even if it weren't true, even with a cash back credit card one is still paying more than what the cash price would be if credit cards did not exist. My understanding is that the credit card industry lobbied long and hard to prevent 'discount for cash' being promoted by merchants. They are definitely convenient and not particularly harmful in educated hands but the profits generated by the industry suggest that most are not well educated. What a surprise.

I guess the good news is that if you have a great credit score the banks are competing hard to get your CC business. So consumers have more power to save or actually get a rebate.



So goods are now less expensive if you use CCs wisely. But CCs are definitely a trap and thats the catch. Been there done that. Never again!

So the advantage clearly goes to the responsible credit card user. Dave Ramsey is wrong.

 

[hopefullyoneday]

Dave Ramsey always claims that debit cards offer the same theft protections as credit cards.
Clark Howard disagrees.

Dave Ramsey always tells people that they can rent a car with a debit card. Sure Dave. Good luck with that.

I think checks are processed now immediately at the purchase point just like a debit card transaction.
Which is nice if you write checks.

I really don't know why anyone would use a debit card for transactions in 2018 with so many banks offering cash back now on credit cards.

My debit card pays me 4% on my balance up to 10k if I use it 20 times a month. I use it for very small purchases and use the cash back card for everything else.