I wanted to dedicate another post to talking about credit cards– as with most personal finance topics, my views are constantly evolving, and I wanted to address my own history, my thoughts about cutting up cards and opting out of the credit system, scores, and more. The info in this post is a bit more updated than the video above, so some of the information related to my personal situation will be different.
My history with credit cards
In my senior year of college, I got the first credit card I qualified for after hearing that I should be using one to build up my credit score. I didn’t really love the idea of it, because it felt super strange to use someone else’s money instead of my own. My parents had told me that building up my score was important, but I truly didn’t understand why everyone treated them like they were so necessary.
I dug into the topic of credit cards more online, and found horror stories of people who had gone into mounds of consumer debt, unable to resist the temptation of maxing out their credit lines, regardless of whether or not they had the money in their bank. There were also stories of people who ran into emergencies and, without an emergency fund, racked up the same debt.
And early on in my journey to learn about all things personal finance, I loosely followed Dave Ramsey’s baby steps. I’m going to dedicate an entire post and video on this in the future, but for now we’ll just cover the specific topic of credit.
At this point in my understanding of money management, I strongly disagree with a lot of what DR says, and one of the early things that raised a red flag for me was his treatment of credit cards: he advises people, no matter what their circumstances are, to cut up any and all credit cards, and not worry about their credit score at all.
This was a problem for me, because I knew that having a credit score was important for having the most options possible when looking for apartments in D.C. I’m glad I didn’t take Dave’s advice, because it would have had a very negative effect on my life, and having a credit card has never caused me to go into more debt. So, why does this advice exist?
Where using credit cards gets messy
There might be reason to cut up your cards– at least, for a subset of people. For some, credit cards create massive amounts of debt in the name of achieving a high score; a completely unworthy trade off. Some people are bad at resisting the temptation to spend money they don’t really have– this is normal. But the important things to realize is that just because you’ve fell victim to this temptation in the past, doesn’t mean you should never use credit cards.
Beyond the online horror stories, I personally know far too many people for which this is true. While, in theory, using credit cards can help you out financially, that isn’t how it looks for most people in reality.
This is an area where we should have a growth mindset about our money management habits. What I mean by this is that it’s possible to LEARN how to effectively use a credit card and change your habits for the better. I think that DR’s philosophy represents a very fixed mindset that if you’ve been bad about using your cards in the past, you won’t be able to change, and therefore you should just completely give up on trying to build better habits.
But this simply isn’t true. Not only do I personally have a lot of folks in my life who have reformed their habits, but there are a lot of money influencers out there who have changed, too. A great example of this is Chelsea from The Financial Diet, who got into thousands of dollars of consumer debt as a teenager before she truly viscerally understood the nature of credit card debt. Here’s a video where she talks about this.
The credit score problem
The way credit scores are measured is problematic. I’m not a fan of the credit system; it’s discriminatory. But knowing the rules can help improve your financial situation and give you more options when it comes to financing and housing.
People are quick to treat their credit score as a measure of how good they are with money, but this is often an easy distraction from the reality of your financial situation. As a quick example, you can have an excellent credit score and a negative net worth. Personally, I have friends and family who have higher credit scores than me and a much lower, sometimes negative, net worth.
When I paid off all my student loans, I was in the best financial position of my life. Yet, because I had closed so many accounts, my score actually tanked. This is where we need to be careful about what we emphasize when we talk about money.
Now, a credit score can be a helpful tool, when implemented correctly. I used my first card to build up my score in order to apply for a card that gives some cash back, which saves me some money without ever putting me in debt.
If you’re familiar with the FIRE (Financial Independence Retire Early) community, you might know the phrase “credit card churning,” which describes an intricate system of having multiple cards and extracting every possible monetary benefit from them. It’s a bit too complicated and coupon-cutterish for the simple financial life I’m trying to live, but it’s another way to use all the benefits of credit cards without falling victim to the extreme downsides.
Let’s talk about how to raise your credit score without going into debt
- Don’t carry a balance (pay off your credit card in full every month)
- Keep cards open for a long time
- Have multiple lines of credit open
Because there is such an array of outcomes a person can experience with credit cards, I will never give blanket advice to “cut them up” or always have one. Some people really should not have credit cards, and some people should use them for the benefits. It’s a situation where you absolutely must know yourself well to make the right decision. But you also can’t assume that just because you’ve had habits of getting in to debt in the past, that you can never reform those habits. All the while, you have to remember that your credit score is nothing more than a tool to enhance your finances, not the ultimate measure of wealth, by any stretch of the imagination.
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