Benefits/Disadvantages of CC’s

Can we just talk about credit cards for a minute.

I am an avid Dave Ramsey listener, and I know his stance on credit cards. My husband and I struggled with credit cards for a while because we weren’t planning for our true expenses and were a bit impulsive admittedly.

So we cut up the one card we had and closed it. However, I’m a bit concerned that this might bite us later. Specifically, we plan to be out of debt in 2020 (YAY!!) and then save up to purchase a home in 2022. We intend on at least 20% down, but I’m not sure I want to go through the manual underwriting (just from hearing complaints about how it makes a long process even longer).

We are just debating if getting a credit card and using it within YNAB’s four rules is a bad idea. I don’t want to ruin our credit, but I also don’t want to be tempted. Suggestions? 

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  • If you are already successfully following your YNAB budget, then there is no issue whatsoever, and not needing to be manually underwritten will increase the number of lenders you can work with. This could have a significant impact on your interest rate, which in turn means tens of thousands of dollars over the life of the loan. 

    I listen to DR periodically so that I know what’s going on in that part of the PF world. This particular aspect of his teaching always strikes me as contradictory, because in all other areas he screams until he’s red in the face about why can’t you have discipline, you’re flabby, you’re lazy, etc. etc. But when it comes to credit cards, his approach is basically, “There's no possibility you could ever be disciplined about this. Cut them up and close them and take the sharp scissors out of your hands.” 

    Like 6
  • The sooner you get it, the older it will be when you want to use it -- and therefore the better your rate will hopefully be. Use category balances for spending guidance and keep the card at paid-in-full status. Always reallocate to cover overspending (or better yet, reallocate in advance so there is no overspending.) Plus enjoy the additional product warranty, fraud protection, and cash-back that CCs provide.

    I really cannot imagine walking around with significant cash on hand, and using a debit card scares the bejesus out of me, given the number of times my CC has been frauded over the years.

    Like 5
  • I LOVE my credit cards for the simple reasons of limiting our risk in fraud vs a debt card and the cash back rewards. 

    In the past I did the typical thing and got stupid using my CCs and went into debt paying interest on everything. I put the cards away, got frugal and every card was returned to a $0 balance after a bit of stress. 

    Now, i use my CCs for almost every single bill and payment i have, This nets me about 2% return on every bill i pay aside from mortgage and auto loans.  Every dollar spent on the CCs is budgeted for with cash in my account so to my budget each swipe of the CC is no different than a debt card swipe. Each month the statement balance is paid in full and in my budget 100% of the complete balance is available so that if i paid off 100% of my CC balances right this second it wouldn't have any impact on the rest of my budget because that money has already been spent.

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  • Almost every dollar I spend goes on a credit card. I’ve never paid a penny in interest. In fact, given the rewards/cash back along with the fact that using the cards allows me to keep almost all of my money in savings at all times, I’m far better off financially than I would be using cash. 
     

    Add fraud protection, extended warranties, and the like on top of everything else and nothing else makes any sense for me. 
     

     Because I spend based on categories, or at least categories that can be covered, I can’t think of a negative for credit cards in my scenario.

    Like 4
  • I've come to learn what Dave Ramsey preaches, but I've never listened to him.  I'm more a Suze Orman gal :).  I think this no credit card stuff is ridiculous.  Who can live like that??  A couple years before YNAB I got upset with myself and cut up a bunch of cards on impulse, and then couldn't get gas the next day and had to go home.  

    Hah while I'm typing this I see Neil Cavuto on Fox Business with the headline "Credit Card Debt to Reach 10-Year High."  Hold on, let me listen.  Ok they're blaming it on the slew of Millennials now getting into their prime spending years on big ticket items.  Figures.

    I *LOVE* credit cards.  They offer so much flexibility, perks, and security.  You just have to be able to manage them, and YNAB is perfect for that.  I've said recently, the people I know who freeze credit cards in ice, cut them up, or even just only have one are always people on the financial edge anyway.   

    Having so many gives me other options that I never know I'm going to need until I need them.  I have a supermarket mastercard that I use for rewards at the store and 10 cents off gas.  But last year they sent me an offer of a balance transfer, 12 months no interest, AND no transfer fee.  It was just at the time I was shopping for an expensive piece of equipment for a small hobby business I unexpectedly started and was growing quickly.  The manufacturer only accepts wire or check (because he can).  I took out a new credit card with my credit union which has no cash advance fees, and loaded it up with the cost of the purchase (about $7k) transferred to my checking account.  I wired it to the manufacturer, then quickly transferred the balance on my CU card to the Mastercard and with YNAB's help started paying it down over the next year (while still using the card).  I ended up paying about $25 in rolling interest for the cash advance until the transfer was complete.  Can you beat that for a business loan??  And I still have the CU card unused until I need a card with its terms, whenever that may or may not be.

    Just use YNAB properly and don't be stupid.  You need a credit card.

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  • Disciplined credit card users reap many benefits.

    Another benefit I haven't seen mentioned yet is how it can dramatically simplify your cash management. Using a credit card for 95% of my spending means I only have two significant debits from my checking account most months: A mortgage payment and a credit card payment. That makes very easy to know exactly how much money I need (and when I need it), and I can park the remainder in a savings account to earn (slightly) more interest.


    Undisciplined credit card users -- people who don't use budgets -- tend to rack up huge debts with terrible interest rates, obviously cancelling out any other benefits associated with credit cards.

    Like 2
      • Habanero Salsa
      • Second generation user
      • Aquamarine_Pony.8
      • 1 yr ago
      • Reported - view
      bret said:
      Another benefit I haven't seen mentioned yet is how it can dramatically simplify your cash management. Using a credit card for 95% of my spending means I only have two significant debits from my checking account most months:

      My credit cards are paid straight from savings. I can have six payments payments a month from there and since almost everything is on a credit card, that’s no problem at all. My checking account exists for quick access to actual cash and random vendors who don’t take cards.  

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      • bret
      • bret
      • 1 yr ago
      • 2
      • Reported - view

      Habanero Salsa 

      Cool!

      I'm guessing from your "second generation user" flair that you might be a bit younger than I am, and perhaps have greater flexibility than I do.

      As a homeowner and parent, there's a handful of bills that I simply can't pay with a credit card -- mortgage payment, day care providers, a couple local utilities and independent contractors (e.g. landscapers). Plus we use multiple credit cards to maximize rewards benefits (= multiple payments each month).

      All told, we average about ~10 outflows from checking each month (compared to over 125 transactions/month on our credit card.) 

      Like 2
      • Habanero Salsa
      • Second generation user
      • Aquamarine_Pony.8
      • 1 yr ago
      • 1
      • Reported - view

        bret The chances are pretty fair that I am a bit younger. I have no daycare expense. My roommates and I have organized the expenses so that my share of the rent gets handled by my paying oversized percentages of utilities, internet, and groceries, all of which go on a card. 
       

      It will probably be the case that I’ll eventually have to keep a little more in checking, but I think I’ll still be able to funnel so much onto the cards that my savings account will still be my primary account. 
       

      With either account, though, I agree with your point that it’s nice to have multiple potential outflows narrowed way down.

      Like 1
  • We also were big DR fans (well, I was LOL). I actually recently wrote a post about the fact that I think I have "outgrown" him. On the subject of credit cards, I have always had issues with his stance, mainly because in Canada our debit card system (which was one of the first in the world) is not on the Visa or MC platform and almost everywhere he discusses using a debit card instead of a credit card doesn't apply to Canada. Visa debit card was launched here a few years ago which is great for the kids online shopping but most places won't honor it like a credit card.

    All of this as a long way of saying that we still use credit cards. When we first started we mostly used cash envelopes and only credit cards for certain expenses. Then we got an awesome cash back card and starting charging more. But I would come home and immediately make a payment in the same amount.

    Now with the way YNAB handles credit cards, I don't have to do that anymore. In effect, YNAB takes the money and allocates it to the credit card so I don't spend it before paying off the card. Last year we got $800 cash back and this year we got $1200. That's a lot of money to leave on the table. 

    Like 3
  • I churn credit cards for the points/cash back. I travel a lot for work and I get substantial benefits from doing all of my spending on credit, and then paying the entire balance at the end of each billing cycle to avoid any interest payments. There's truly no reason not to do spend this way EXCEPT for the fact that you can get yourself into trouble if you're not carefully budgeting all of your expenses. Luckily, YNAB is great for such things. It's helped me achieve this goal. Nothing ever goes on the card that can't be budgeted.

    Now, if you're prone to temptation with the cards, then I recommend DON'T do it. Instead, a good way to build your credit is to get out a loan from your local bank. Put it in a high interest savings account and make the payments on it to your bank. With this method, you're stuck making interest payments (slightly lower if you're in the high interest account) but it doesn't carry with it catastrophic interest rates if you don't do things correctly.

     

    I love Dave Ramsey and he's done a great job getting many people out of debt; but debt can be used in your favor so long as you're doing things correctly. Dave is for people who have a hard time with debt (and for everyone else too); but I believe many of it is beginner level finance. Take Dave's advise and then adapt it to real world circumstances. I think that's the best way to go about it!

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  • Hey there dedebtfreegirl!  I did FPU in April and did Dave Ramsey's baby steps religiously since then, including cutting up and then later closing all of my credit card accounts in July, including a card I had had since ~2003, I believe.

     

    I already had a mortgage and was paying off a HEL in BS2, so it actually hurt my credit much less than you'd think.  I had >800 credit score before, and it dropped to the high 700's after, which allowed me to get the best rates on a refinance I just completed in Dec, into a 15 year mortgage at 3.125%

    However, since I found out it would affect my insurance rates and my job options if my credit score continues to drop, I just decided to apply for two credit cards so I can use them the YNAB way and hopefully get my credit score back up.  My refi hurt my score since it made my 2013 account into a new account and the age of accounts is a big factor.  I'm sure my credit will stay down for a few years and then go back up.  I just applied to two new cards, one for my business and one for me to use for personal expenses.

     

    Dave is absolutely right for people who have problems with credit cards.  He is also right in that, using credit for so many years made me feel safe not saving up an emergency fund, which meant I went into debt when I hit an emergency (divorce).  So my new rule is that I can use credit for my expenses if I save up a 6 month Efund, stick to my budget, and check my expense is in my budget BEFORE swiping my card.  I believe this should cancel the over-spending effects of credit cards in the brain, because I will feel the pain of a lower category balance as I swipe my card.  But I also promised myself that, if I don't stick with this, I will freeze my card (ie stick it in a block of ice in the freezer so I can use it only if necessary in an emergency) and just charge a few regular, automatic bills on it to help maintain my credit, but not use it for any non-mandatory expenses unless I am sticking to my budget.

     

    I actually did get out of debt with DR's baby steps in grad school, except I kept my cards and skipped BS3.  I paid off my balance every month until I went through the divorce, but I'm sure I would have spent less if I was on a budget still and not using credit cards.  It also allowed me to end up one month behind on my bills.  If you can stay disciplined about it, the YNAB way of using credit cards is great.

     

    Not sure what my score is today, but I had a >$25k limit on my Citicard before I closed it, and I just applied for the double rewards card and was only approved for a $6.5k balance.  LOL, closing my cards for 6 months and only making my debt lower somehow made me less credit worthy.  However, if I had never closed my cards I probably would never have realized that I should get new credit cards that now give me 2% cash back (instead of my previous 1% with 5% on a special category I had too sign up for every quarter), which is a great deal if and only if I only spend the same amount as I would have spent without the rewards.  Hence YNAB. 

     

    Basically, he is right that it's stupid how important credit scores are in this world, but he is rich and can afford to say F-U to the man.  But I can't.  And you can't either, probably.  So you have to jump through the hoops if you want to win the game, which means trying to maintain a good credit score.

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    • PhysicsGal said:
      check my expense is in my budget BEFORE swiping my card

      ^^ this is crucial.

      Like 3
      • Annieland
      • I was told there would be no math.
      • Annieland
      • 1 yr ago
      • Reported - view

      PhysicsGal I'm not a follower of his and only gather anecdotal information from posts and various internet articles.  But for reasons like yours, I just don't understand how it is ethical to convince all people (brainwash, almost) to get rid of all credit cards.  I understand if someone has a SEVERE spending addiction and needs debtors anonymous or something.  But you had an 800+ credit score!  Yes, you're working to improve your financial situation, you've had life-changing circumstances, and you're financially literate and engaged.  Regardless of how imperfect the credit card scoring process is, why should you have to take a credit score hit because he said so?  

      I actually refinanced my mortgage in Sept. to a 15 yr 3.125% too, like you!  It was totally spur-of-the-moment because I saw interest rates were plummeting, our finances were looking up, and the numbers made sense.  Every time I think I won't need any credit for a while something just comes up, like the business purchase I mentioned above, the refi, a great offer, etc.  I have a high earning friend who is just terrified of credit but does use the one card she got 20+ years ago in college (with a totally useless rewards program).  She constantly freezes her credit "because we're not taking any loans."  And then her husband needs a business card for work.  Every time her card gets compromised she's running back and forth from the ATM for two weeks and can't even order something online.  And yes, I also have a friend with the cards in ice and yet somehow she's always spending and can't save up a downpayment.

      I know you're new to YNAB and I think I have a lot in common with you.  I predict the Dave stuff will quickly be diluted as you use YNAB more and continue to educate yourself in true financial freedom, with no restraints and the ability and confidence to make your own decisions.

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      • PhysicsGal
      • Nerdy female homo sapien
      • physicsgal
      • 1 yr ago
      • Reported - view

      Annieland Congrats on the Refi!  I dunno about you but I can't wait to have a paid for home in 15 years, at the most.  We should share  a virtual glass of wine someday to celebrate it in 15 years  :D

       

      Of course now I regret closing those credit card accounts, but it also annoys me I have to play the credit game and "play kissie face with the banks", as Dave says, to do basic things like not get charged extra for insurance and get a job.  I thought I wouldn't need a loan again, then interest rates went down and I wanted to refinance.  I was annoyed with myself because I know for a fact that if I had not had credit cards since the first time I got out of debt in 2010 I would have saved a full emergency fund, (believe me, being credit card free with only a $1k Emergency fund while going out of debt is certainly motivating to want to build up a full Efund) not gone into as much debt during my divorce.  I also think he is right, for those years I may have paid off my balance each month and not paid interest, but the credit cards made it easy to spend more than I would have if I were actually budgeting and careful with my money and the credit card companies won, even if I got my 1% cash back rewards.  They allow you to be sloppy and allow some people to make a downright terrible mess.

       

      On the bright side, my old cards only gave me 1% cash back and I wasn't really looking into new cards so I would have kept using them for a long time if I hadn't gone through this divorce, then debt, then Dave Ramsey.  I had no idea that you can get 2% cash back on all purchases these days.  So if I keep using my cards the YNAB way, maybe I can beat the credit card companies at their own game this time.  Also I've realized that, even if debit cards have the same protection in theory, in reality it would be a much bigger pain in the A$$ to have your debit card stolen than you credit card.

       

      And now, with the help of YNAB, I'm a month AHEAD, rather than always paying last month's balance on my credit card with this month's money, like I was before.  And I'm down to $11.9k on my HEL, after starting with $28.4k total debt in May 2019 doing it Dave's way.

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      • PhysicsGal
      • Nerdy female homo sapien
      • physicsgal
      • 1 yr ago
      • Reported - view

      dakinemaui Yep, indeed!  I still plan to use  cash envelopes for certain expenses, like eating out and fun money, because they keep me honest.  And I really love the "roll with the punches" rule, so that, even if I forget to check or am rushing or sh$% happens, I can fix my budget after the fact if necessary.

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