Interesting viewpoint on credit cards

[MichaelB]

Well, I just listened to the clip in Walt’s OP, and I must say, it was enlightening. First time listening to Mr. Ramsey, and probably the last. He could easily make his point without being so dismissive or demeaning of other viewpoints or the people that write in.

The statistic he threw out, people using credit cards spend 12-18% more, doesn’t make sense to me. If this means that over one single point of time, like a night out, then yes, it could be that people using cards spend more. Over a couple of years, though, people’s spending is limited by their disposable income, credit cannot grow forever, interest consumes a growing share of spending, so people with cards actually end up spending less. In other words, over long periods, spending is determined by disposable income, not credit cars vs cash.

The other thing that doesn’t fit well is, if personal finance is behavioral, why someone using only cash would be expected to spend in a more disciplined way. If they don’t have the financial discipline to use a card, they don’t have it for cash either. Cash does not protect someone from making poor choices.

 

[joeea]

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.

What say you?

I say Ramsey preaches to a different audience than the one here. Ramsey's listeners appear to be mostly in huge debt or have recently cured themselves of indebtedness.

Perhaps the kind of folks who enjoy a good Debt Free Scream are only able to control their spending when using cash. So the Ramsey philosophy might work for them. I don't know, because I've never been part of that group.

I say - use whatever works for you. For me, my brain doesn't need to say "Ouch!"

 

[joeea]

The other thing that doesn’t fit well is, if personal finance is behavioral, why someone using only cash would be expected to spend in a more disciplined way. If they don’t have the financial discipline to use a card, they don’t have it for cash either. Cash does not protect someone from making poor choices.

Once you have spent your $100 in cash, you have no more to spend.

Once you have spent $100 on a credit card you can continue to spend up to your credit limit. It's not "current money". Instead it's "future money". And many people are not disciplined about the future.

Ramsey is entirely correct about the behavioral economics of it.

 

[njhowie]

Dave Ramsey is primarily catering to folks who have financial "issues". Though what he recommends could be applicable to anyone, it is most applicable to those who are unable to manage their own finances.

Much of what he puts forth has a basis in psychology. Consider his snowball approach to paying down credit card debt. For those who are financially adept and do carry credit card debt, they would say, "That's easy - I would pay off the highest interest rate credit card first, then move on to the next highest, and so on". This obviously results in the lowest cost. However, Dave advises paying off the one with the lowest balance first, and then the one with the next lowest balance, and so on - regardless of the interest rate, because of the psychological motivation it will provide in seeing one less account needing to be paid off. Folks who have financial difficulty need these kinds of psychological reinforcing "games" to allow them to get out of the hole.

His advice of paying with cash amounts to the same psychological gamesmanship to instill better spending habits for those who need it.

Though there's nothing wrong with it, it may not be the most financially beneficial.

 

[frayne]

I have no problem with Dave's take on credit cards and cash and in fact have pretty much followed that path for the last forty or so years. Have only ever had one credit card, use it primarily for gas and online purchases and everything else is bought with cash. Also have never paid one penny in CC interest. In my way for thinking a credit card is a debt machine for the undisciplined person and creates a lifetime cycle of debt for many folks.

 

[exnavynuke]

As some have eluded to, Dave Ramsey doesn't give "financial" advice. He gives "motivational" advice about finances.

For the "average" person that seeks advice on finances, their discipline is insufficient to follow through on sound financial principles alone. I'd wager that there are very few (if any) people without mental disorders that believe spending more money than they have is a good idea. However, knowing that it's a bad idea isn't enough to keep a large percentage of the population from doing so. Dave Ramsey's fortune has been amassed by selling his motivational techniques to avoid/recover from such bad decisions that his audience has made in the past.

His average viewer won't use credit cards responsibly, so he comes up with ways to justify not using them. Simply telling people to only use them responsibly won't work... since everyone knew that from the start and most of his viewers still ended up screwing up. So the next best thing is to tell them not to use them at all. Any justification (even if it only applies to some of his viewers and some of the people who might hear that advice) is good enough if it keeps *most* of his viewers from "falling off the wagon".

Similarly, his "pay lowest amount" first may mean spending more money to get out of debt for many of his viewers, but if it means that more of his viewers DO get out of debt eventually (as opposed to giving up before they finish paying off any debt because it seems too hard), then it seems like it was productive advice overall. Maybe not the best financial advice for many of his viewers, but the best financial outcome for his viewers overall.

As such, I've kinda given up criticizing him for the advice he gives that I know would be bad, financially, for someone like myself; because I realized it's probably good, financially, for his viewers overall.

 

[ERD50]

I have no problem with Dave's take on credit cards and cash and in fact have pretty much followed that path for the last forty or so years. Have only ever had one credit card, use it primarily for gas and online purchased and everything thing else with cash. Also have never paid one penny in CC interest. In my way for thinking a credit card is a debt machine for the undisciplined person and creates a life time cycle of debt for many folks.

OK, but this also means you've lost out on the 2-4% savings you can get on a large number of your purchases. Day after day, month after month, year after year. Those savings add up. Plus the float, plus the ability to more optimally plan for moving money - since a check or debit or cash withdrawal hits faster than a CC purchase.

Why "deprive" yourself of that savings, if you can learn (like so many people have), to purchase wisely, regardless of the method of payment?

We've seen the stories here - some people who were in debt, and managed to work their way out and use credit as a tool for good. Maybe not everyone can do that, but why assume it?

-ERD50

 

[frayne]

OK, but this also means you've lost out on the 2-4% savings you can get on a large number of your purchases. Day after day, month after month, year after year. Those savings add up. Plus the float, plus the ability to more optimally plan for moving money - since a check or debit or cash withdrawal hits faster than a CC purchase.

Why "deprive" yourself of that savings, if you can learn (like so many people have), to purchase wisely, regardless of the method of payment?

We've seen the stories here - some people who were in debt, and managed to work their way out and use credit as a tool for good. Maybe not everyone can do that, but why assume it?

-ERD50

I see your point and it has validity. On my VISA I do get a reward that lowers my gas purchase price. Again, this system has worked for me for many years and started using it long before CCs started offering perks like cash back, airline miles, etc. Oh and as a side note for bigger ticket items over $200 we use the CC.

 

[athena53]

Much of what he puts forth has a basis in psychology. Consider his snowball approach to paying down credit card debt. <snip>Folks who have financial difficulty need these kinds of psychological reinforcing "games" to allow them to get out of the hole.

His advice of paying with cash amounts to the same psychological gamesmanship to instill better spending habits for those who need it.

Though there's nothing wrong with it, it may not be the most financially beneficial.

The field of Behavioral Economics addresses why people make financial decisions that don't make sense if you look strictly at the numbers. Much of what Ramsey teaches recognizes this. One might even say (cough, cough) that people who insist on having a paid-off home in retirement even though their investments are yielding twice the mortgage interest rate they'd be paying are behaving irrationally.

Whatever keeps you solvent and helps you sleep at night.

 

[btdt22]

Who the heck uses credit cards anymore?

My personal computer, aka 'smartphone' is used for most of my financial transactions at brick and mortars, while eBay, Amazon, and PayPal fill in most of the remainder of my purchases.

Long time retired and over 70, I keep a few hundred in my wallet for an emergency, such as power failure, tow truck, etc.

 

[Amethyst]

Faith in humanity aside, it would have been somewhat burdensome to gather and carry enough cash to pay for the things and trips we've purchased over the past 2 years. I suppose we could have paid by check, but that involves mail and processing delays. You can even lose out on timed discounts if you can't grab them quickly with your CC.

I

But the main reason I posted that video was that about 18 months ago we changed from paying mostly cash to mostly cash-back credit cards and didn't notice any changes in our spending, and I wondered if anyone else had. Apparently not, at least by the members of this forum. My faith in at least a portion of humanity is thereby preserved.

 

[Chuckanut]

Just as with politics, diet, exercise, religion etc. we all see the world through our own lens. Most of us are here because we can manage our money very well on our own or we have a partner who can do it well. Perhaps a few of us managed to inherit wealth, and hopefully by being on a site like this will manage to keep it for life.

One thing I learned early in ER is how many people who are 'my age' group don't understand the simple power of compounded earnings over time.

 

[ERD50]

Just as with politics, diet, exercise, religion etc. we all see the world through our own lens. Most of us are here because we can manage our money very well on our own or we have a partner who can do it well. Perhaps a few of us managed to inherit wealth, and hopefully by being on a site like this will manage to keep it for life.

One thing I learned early in ER is how many people who are 'my age' group don't understand the simple power of compounded earnings over time.

Just as you are doing! But "my lens", as I've stated in this thread, is that I understand that not everyone has the same financial discipline as the average forum member here. So I'm not trying to put them all in the same basket.

Looking at the world through "our lens" doesn't mean we can't understand other people's situations. If that was the case, no one who isn't starving would donate money to the foundations that feed starving people. No one who hasn't had cancer would donate to a cancer fund. We'd all be like "Huh? What does it mean to be hungry or sick? I can't relate, must not be a real problem". But most of do not act that way. We can look outside our own experiences (unlike most/all animals?).

But I also say that doesn't meant that there should not be an attempt to teach those those undisciplined people. Don't just give up, and assume they can never do better. That is my beef with Dave Ramsey (and he uses bad logic, and assumes people are stupid).

I think it was another video, he said that some 30% of people pay cash at restaurants. And that one of the CC companies was offering a reward to restaurants that stopped accepting cash. He made the illogical leap that those places would be giving up 30% of their business. Well, we don't know that, maybe many/most/all of them would pay by CC if that was the only option. And then he uses this flawed logic to go on to say that these businesses would be stupid to accept this reward from the CC companies in exchange for 30% of their business. Well, then what's the problem? If we assume the business isn't stupid, they won't do it!

My BS detector goes like this - if someone has a solid point to make, they will use solid logic, there is no need to use poor logic. As soon as they slip into bad logic, the flags and buzzers alarm. DR uses lots of flawed logic.

-ERD50

 

[NYEXPAT]

If you're listed as an authorized user on someone's account (what it sounds like you're doing) then the credit reporting agencies most likely have that card on file for you and the account owner's credit activity will most likely be reported on your credit report. YMMV of course but that's how it generally works with authorized users.

Probably, in some cases it is true. Here in Peru there are no credit records for me although there are for my Peruvian wife, Every year she needs to sign a Financial guarantee for me to stay legally. So, I have to live with the shame of that as well as using someone else's credit on our international trips!

Back on topic, I do not know how your credit score can go to zero? I have not had any assets,debts or credit in the USA for the past 15 years and maintain a credit score in the 760-790 range. Every few years when it drops below 770 or so I make it a point (when I am in the USA) to buy a few $100 worth of junk at Kohl's & Ross. They always offer me a credit card and a 10-20% discount on that initial purchase. I then pay off the credit card at the same cashier and walk out. there is an immediate bump to my credit score that lasts a few years. Eventually, Kohl's & Ross cancels the card for lack of use, rinse and repeat.

 

[Pilot2013]

One might even say (cough, cough) that people who insist on having a paid-off home in retirement even though their investments are yielding twice the mortgage interest rate they'd be paying are behaving irrationally.

Whatever keeps you solvent and helps you sleep at night.

I love it! Couldn't have said it better myself!

My thought is, if the guy bothers you that much, ignore him. I personally think the unsophisticated (financially) people out there can benefit from his approach to finances. They will likely never understand the principles others (on here) see so clearly are more beneficial.

Just turn the channel already....

 

[swaneesr]

My wife and I have listened to Dave Ramsey on and off for many years typically by putting on the podcast while on a long drive. Both my wife and I enjoy many of the absurd calls. We always pretty much know what Dave’s response will be.

As many have already stated he is motivational speaker and entertainer on the subject of finance. Much of his advice is sound. Self control, financial discipline, taking action to form a budget, working with your partner to both engage financialy. These are all good things.

I use credit cards and collect cash back. I read lots of financial books and information online. I use the advice that makes sense and ignore the rest.

What confuses me is the reaction to attack Dave Ramsey. I see his religion, politics, or net worth irrelavent to the OP.

Dave Ramsey freely admits his techniques are not about the most efficient way to get out of debt based on math. It is not a math problem for most people, but one of self control and motivation.

Ditto - just turn the channel already....

Respectfully,
SwaneeSR

 

[mpeirce]

What confuses me is the reaction to attack Dave Ramsey.

Me too.

I know of couple of folks who have been really helped by his Financial Peace program. I'm sure there are many similar folks. This folks didn't need to see the most optimal way to get extra kickbacks from their credit cards, they need to shape up and stop acting so stupid. Dave helps those folks.

 

[scrabbler1]

I would argue that being able to use a CC instead of cash enables me to save some money.


I have undergone a transition about 4 years ago when I got a cash-back CC from my own bank (the one I have my checking account with), and began using it at the grocery store for many of my routine purchases (those at least $40 and some between $30 and $40). Before, when I always used cash, if my most expensive item (boneless chicken cutlets) was unexpectedly on sale, I was limited to how much of the sale item I could buy based on how much cash I was carrying. Now, I am no longer constrained by that limitation.


And it isn't like I will find myself cooking and eating more cutlets just because I have a few more packs of the frozen stuff in the freezer waiting for me to use them a few weeks or even months from now. But it does mean that I never, ever have to worry about having to pay full price for it again. The sale price is often $2 per pound less than the regular price, so if I buy 10 pounds of it in a single trip, that's a $20 savings, hardly trivial.


I made a quick-and-dirty comparison between my cash+CC purchases before I made this transition circa 2014 to afterward to see if there is any pattern. It fluctuates, of course, and the CC data has become polluted with some purchases I once made by check such as for some medical expenses. But these hasn't been any upward pattern. The cashback is minimal and little more than icing on a cake. Being able to manage the account and easily pay the bill through online banking I find far more useful.


Other than the grocery store purchases and to pay ordinary bills I would have paid with a check, I rarely use my CC anyway. As those of us here in the forum know, using a CC is a tool we can use to help with our everyday lives, and to our benefit, financially or otherwise. Used badly or in an irresponsible manner, such as the way DR is suggesting, it can be costly. That is DR's audience, not us.

 

[meierlde]

On travel I recall back in the late 1960s when my parents took us on a long trip, it meant getting a lot of travelers checks at the bank and cashing them as needed as back then motels and restaurants were quite used to that. Also bank then you generally did make reservations since it took an expensive phone call to make (Long distance was quite dear back then). Could not do it today as most places won't take TC's and few banks sell them.

I might add that back then my Grandfather had an account at Merril Lynch and figured he could stop at an office if he needed cash. ( I recall in 1971 when my dad used a credit card to buy a camera in Pasadena, Ca when we lived in MI it was a big deal).

 

[CaliKid]

I definitely spend more by using credit cards. Yes, I pay it off every month but it's still $15k-20k a month. I am confident I would forego a lot of purchases as being too much of a pain to pay by cash or check and to a smaller extent others for the ouch of spending cash. It's not a big deal but I think it's very real. Using a credit card is very easy.

 

[RobbieB]

Yup, cash back, a credit score so people you want to borrow money from know you exist. What was I taught at an early age?, yes, establish credit early. My first job (out of school) came with a credit card. You know, so you can rent cars and such.

And now we have this gas bag telling us to forgo all credit and strive for a zero score?

And live where? In an apartment or a house? Maybe a cave would be good? Or under a bridge in a refrigerator box? I know he gets paid 55 million to tell people this. Zero credit score. It could work if you have 55 million eh? Works for him.

Oh I know, residential hotel, pay by the week in cash up front.

Just listen to me and do what I say and you can have 55 million too. Gas Bag.

 

[Pilot2013]

Yup, cash back, a credit score so people you want to borrow money from know you exist. What was I taught at an early age?, yes, establish credit early. My first job (out of school) came with a credit card. You know, so you can rent cars and such.

And now we have this gas bag telling us to forgo all credit and strive for a zero score?

And live where? In an apartment or a house? Maybe a cave would be good? Or under a bridge in a refrigerator box? I know he gets paid 55 million to tell people this. Zero credit score. It could work if you have 55 million eh? Works for him.

Oh I know, residential hotel, pay by the week in cash up front.

Just listen to me and do what I say and you can have 55 million too. Gas Bag.

On ignore now, see ya

 

[Sunset]

I used to use cash for Aldi, what a pain it was to make sure I had over $100 in my wallet. Now that they take CC shopping is easier as I buy what I want without worrying I won't have enough on me to pay.

We pay ours off every month, so a very rough estimate is the CC companies pay me an easy $500 /yr on average to use their cards.

However, I have a relative who will spend right to the limit on the CC, and then try to get the limit raised. She will forever pay the monthly interest cost of $100 as she keeps using the CC when possible, and only paying the minimum.
For her life would be cheaper without a CC.
No matter how much I talk to her about it, nothing changes, it's like a Crack Card addict.

 

[YVRRocketSurgery]

I think that was the first Dave Ramsay video I watch. It's likely my last. Man, he's annoying. I can't stand to listen to that kind of "I know it all" type delivery.

That said, I do agree with his point to a degree in that I don't think it "hurts" as much at a point of purchase when you pay with a credit card, room key, cruise card, etc vs cash. However, I don't find it practical spending cash and I find the benefits using a credit card far outweighs the psychological restraint using cash may provide. The core problem is that most people don't give enough thought to how much benefit they are going to get when spending their finite dollars.

Even though I may not feel the hurt as much during point of purchase using a credit card, I'm constantly (nearly daily) checking the status of my accounts because my banking (savings, chequing, credit card, investments) is integrated. I feel the pain when checking my accounts and seeing the value of our chequing account reduce in value after paying the credit card bills which I try to do throughout the month instead of waiting for the payment date.

 

[Perryinva]

+ 7 agreement to the others about his target audience (Suzi Ormann etc) and that for credit card problem people. Since We don’t buy what we don’t need, makes no difference. Rebate cash, points etc may be minor but also allow things I WOULD never spend the actual cost on, like Business or First Class to Europe. I could also save beaucoup bucks living in a cheap location 1000sqft house, but I don’t. Silly advice for people that can handle money and you have to assume DR knows that too.