In the personal finance world, there’s a debate that rages regularly about whether young people should or shouldn’t use credit cards. And most voices that are speaking out on the subject are proponents for one of two extremes.
The “Stay Away From Risk” Perspective
On the one hand, there are many who feel passionately that young people should NEVER use credit cards. These people ask:
Why in the world would you risk all the bad things that could happen when you use a credit card?
They truly believe that credit card debt is the beginning of all financial downfalls, and they should be avoided at all cost. Dave Ramsey (who I greatly respect) would probably be the most famous proponent of this viewpoint.
The “Don’t Flush Money Down the Toilet” Perspective
On the other side of the issue, you have many finance bloggers who talk about the many benefits of having credit cards: the cash back you can receive, reward points, and free hotels and flights. In their minds, it’s an absolute waste of money NOT to use credit cards. These people ask:
“Why in the world would you not want to save 2-5% on every purchase?”
In their mind, using a debit card or cash really is like flushing money down the toilet.
The problem is that because both sides are so entrenched in their camp on the subject, very few people are willing to look at the credit card issue from a balanced perspective. Each side just thinks the other is stupid and foolish.
So let’s talk about this thing, calmly and quietly, shall we?
1. Credit Cards Can Be Great.
First of all, I’ll go ahead and get this out of the way. Yes, I do use credit cards. Why? Well, quite frankly, because of all the reasons pointed out above from the pro-credit card side.
Honestly, I do love the rewards points. Early on in our marriage, I became a credit card rewards nerd and started reading everything I could from sites like Million Mile Secrets and The Points Guy.
Through the years, my wife and I have been able to master the credit card game and have gone on numerous vacations virtually free, and earned hundreds of dollars in cash back and gift cards, all thanks to credit card sign-up bonuses.
It’s true that some of the credit cards that offer the best rewards require a good credit score. If you aren’t sure where you’re credit score is at, Mark Huntley shares at least six different places you can get your credit for free in his free credit score guide.
And if you do have a good credit score, don’t worry that applying for a credit card will blow it. We’ve been credit card hacking for years and our score is still in the 800s.
2. Credit Cards Can Be Awful.
So I think everyone should use credit cards, right? Wrong.
Why? For of all the same reasons that those from the anti-credit-card side will say young people should not even consider them.
The truth is, for many people, when they have plastic instead of cash they will naturally spend more than they should.
You, in fact, maybe someone who knows that you can’t handle the temptation to buy more than you can afford when you are using a credit card. And before you know it, you’re in minimum payment purgatory.
Credit cards can be abused. It’s true.
And when they are, they can ruin lives and marriages. If you are someone who feels like you’re drowning in your debt, I encourage you to check out our “How to Get Out of Debt” guide.
3. Credit Cards Can Be Abused…but That Doesn’t Make Them Evil.
Just because something could be abused by some, doesn’t mean it must be avoided by everyone.
Sweets can be abused and cause great physical problems if not eaten with discipline and moderation. Should we outlaw sweets because some may abuse them?
Obviously not. In this case, forcing universal abstinence isn’t the best way to address the abuse of a few. In fact, in nearly every other area of life where abuse can occur, we correct those who are behaving in excess and encourage them to return to moderation.
For certain people, total abstinence of sweets may be what’s best for them. They may know themselves well enough to realize that when they start to eat sweets, they simply don’t have the discipline to stop. For people who fit that description, complete abstinence is their best strategy for success.
It’s the same way for debt.
If you know that you are not someone who cannot handle having credit cards without abusing them, then by all means, cut up your cards immediately!
But you may be thinking, “How do I know when my credit cards are becoming a problem in my life?”
Well, I will tell you what my litmus test is. And just to forewarn you, you’re probably going to think it’s a little harsh.
4. If You Are Paying Interest, You Have a Credit Card Problem
This has been the requirement that Kendall and I have always put on ourselves. We made a commitment that we would always pay our statement balances in full and would never pay any interest on our credit cards.
In this way, we are essentially using our credit cards like debit cards…except we get lots of perks thrown in, like rewards points, free vacations, a higher credit score, and better consumer protections.
But we’ve always promised ourselves that if we couldn’t pay our statement balances in full and started paying interest on our purchases, we would have “plastic surgery” and cut up our cards. Why?
Because credit card interest is the real enemy of your financial health, not the credit cards themselves.
Why do the credit card companies offer all those rewards and perks? Because the law of averages tells them that if enough people get their cards, a certain percentage of them will spend more than they can afford and will end up paying loads of interest on their credit card debt.
They can afford to give away free money on the front-end because they know they’ll make it up on the back end.
But here’s the thing, this is one of the rare situations where you CAN have your cake and eat it too. You CAN use those rewards and NOT be one of the suckers who end up paying out his wazoo in interest…as long as you are disciplined enough to only spend what you’ve budgeted for each of your budgeting categories.
And if you can’t do that with a credit card? Then forget about the rewards points.
You’re better off just paying cash for everything and just saving up for that vacation with all the interest you’d be saving. And if you have a hard time booking your hotel or rental car for that vacation without a credit card, read my guide for ideas.
Conclusion
Does it sound like I’m giving both sides a lot of credit (pun intended)? Good. Because they do both have great points that need to be considered.
You just need to be honest with yourself about whether credit cards would be a good or bad thing for you – taking into account your personality and your spending tendencies.