Interest in The Pudgy Gazelle has been really great since launch a few days ago! Wanted to, again, thank everyone!
Just last night, the topic of credit cards came up, so I thought it would be a good blog topic to delve right into head first.
It can be a polarizing topic, for sure. Dave Ramsey followers know full well that he is fervently anti-credit card. Other plans advocate for responsible card usage. Banks sell you credit like smarmy car salesmen on a regular basis. So, who's right?
I don't think there is a "right", really. Ok. That's not true. Personally speaking I have never really seen a whole lot of good come from credit cards when you're speaking in terms of wealth building. Our whole mission here with reaching financial fitness is to be in a position to BUILD wealth, not play patty cake with the bank. But, that's just ...like...my opinion, man.
The last time we took out a line of credit was for our business. We were definitely feeling the pressure to supply our store with the latest and greatest, the best inventory, etc. Could we have cash flowed that? Yeah, probably....but we were impatient. We were impulsive. It was not a smart business move, even though the purchases we made on the business card resulted in some cash back. That "cash back" was a tiny blip on the major radar of our business expenses. It didn't move the needle an inch toward wealth.
So, we have sworn off credit cards. We will no longer borrow money to fund things. Done. Fin. Over.
So, what should you do in terms of credit card use?
Here's some points to ponder, perhaps it will help you decide if credit card use is the best way to reach your financial goals.
CREDIT CARDS GIVE ME POINTS/REWARDS. CASH DOESN'T.
Yup, you're right. There are cards out there who will bestow upon you a whopping 2% back even on qualifying purchases. That means if you spend $1000 in a month on that card, you get a whopping $20. TWENTY. DOLLARS.
Now, lets compare this to an investment into a good growth stock mutual fund. Take that $1000 you spent on things you probably didn't need and invest it. Heck, invest HALF of it!
Over the past 3 years , we have made over $20,000 through our investments. With Credit Card "rewards" we would have made maybe, what......$720? Maybe $1000 if we got really spendy. In 3 years? In order to match the gain we have obtained with investments (in a down market, even!) we would have to spend $1,000,000. Yes. That's 6 zeros.
Credit Card rewards are not a good return on investment. You spend more willingly with credit chasing those points/rewards (this has been proven through many studies. People spend loads more when using credit vs. using cash).
Imagine if you sat across from your Edward Jones dude and he said "hey, you know that investment of $1000 you put in? What if I told you it could gain $20!"....I wouldn't be terribly impressed.
You work hard for your money (so harrrrd for it honey......)....you want it to work for you in the best way possible.
No one gets rich off the use of credit card rewards. No one.
CREDIT CARDS ARE NOT A SECURE SAVINGS PLAN
Take it from a family that has weathered 2 job losses.....shit happens. It just does. People get laid off, businesses fail, jobs don't work out....it just HAPPENS. You never want to find yourself in a position where you are straight up stuck.
Now, say you are playing the bank's game (because it is their game, not yours) and racking up the credit card rewards. You want that $25 Amazon Gift card, Gol Dern It!
You spend $1000-$2000 a month....but you pay it off at the end of every month. You are Mr. or Mrs. Responsible Credit User. After all...REWARDS!
But, then you go to work one day and they give you a box and show you to the door (this actually happened to me. No joke. A box. A really small box).
You come home, and you're looking at a $2000 or more credit card bill and you just lost your income. I mean, you have a $25 gift card....maybe that'll help?
Credit Cards are a tool for the BANK to make money.....not you. You will never, ever, ever beat them at that game.
Like I said, life happens. You lose your job, the chances of your whole "pay it off every month" plan going out the window are pretty good. Why risk it?
Now, if you have investments? You can stop contributing for the length of your unemployment and those still GROW. Even in a tumultuous market like we've been having in the last year or so, you still stand a better chance of growing wealth by keeping your money solid in a diversified portfolio of investments. The market will come back....the only thing coming back to you from the credit cards if you lose your job are fees. Collection calls. Interest rate hikes.
WHAT ABOUT OUR FICO SCORE!!! (CLUTCHING MY PEARLS!)
We refinanced our house this past summer, and while sitting in the mortgage guy's office he brought our FICO scores back to us. I honestly had no clue where we were at.
Apparently they're amazing. He heaped praise on us like we had done something incredible. As if it was a sign of our financial fitness.
I'm such a Debbie Downer. My response "All that tells me is we borrowed way too much freakin' money".
I was not amused.
Neither was he.
Most people chase that 750+ score. They take out cards hoping to "build their credit" so they can get good interest rates on mortgages or cars. So, they're building their credit so they can borrow more money. Makes sense.
It's a vicious cycle, it really is. We've been told practically from birth that this is how you "win". Keep your score high and the possibilities are endless.
Your FICO score doesn't even factor in your debt to income ratio. So, you could be making $40,000 a year, be $50,000 or worse in debt, but your FICO score could tell people you are good with handling money because you pay your minimums every month.
Our personal goal is to get to the point where our FICO score is "indeterminable". What that means is we are debt free, the cards are closed, we go years without borrowing a dime, we have socked away savings for emergencies and for purchases, and we don't have to worship at the altar of the bank any longer. It's a lofty goal for sure, but totally attainable.
But, PG you say....what about getting a mortgage? Surely you need a FICO score!!!
Not necessarily. If you have 20% down to put on your home, you are after a 15 year fixed rate mortgage, and you are dealing with a mortgage company that is willing to do a bit of work, you can go through what's called "manual underwriting". This is where they will look at factors such as your job history, rent payments, utility bill payments, etc. to assess your ability to pay back the mortgage. Not every mortgage company will do this, but honestly if your mortgage company isn't willing to really LOOK at who they're potentially lending to....are they worth their salt?
A 15 year mortgage is the only debt that Dave Ramsey "approves" through his plan, by the way. But, only if you're debt free and have saved your 20%.
We hope to buy a new house within a year of becoming debt free (maybe)....so honestly our credit scores will probably still be there....and still be "amazing"....because it takes awhile for them to just go away completely. So, whatever.....still not interested in basing my financial decisions around a simple number.
Does this mean go and TRASH your current credit score? Good GOD man, no. Have some common sense and all that. A CRAPPY credit score and NO credit score are not the same thing! But, it's not the be all and end all of your financial picture. Just keep that in mind.
YOU WILL SPEND LESS WITH CASH
This is an EMOTION factor. With cold, hard cash in your hands you are getting a look at exactly what you have to spend. In real numbers. It's not swiping a card and getting a little surprised at how overboard you went at Target last week in a month's time.
Cash is physical. It's an emotional separation spending your budgeted "food" money at a restaurant knowing full well you gave yourself $150 for the week and you just blew $75 of that on sushi.
Credit cards separate you from that emotional connection to spending. It's a buffer. It's a mental response "It's okay.....you'll pay it off later....think of that 2% reward"!
Some people are incredibly responsible credit users. They are a rare breed, but there are people out there who only use their cards to get airline miles or whatever. Like I said, rare breed.
I compare it to alcohol. I am not much of a drinker. Every ONCE in a great while I'll have myself a glass of wine with dinner. Maybe once every 6 months or so. It's not because I don't think I can handle it, it just doesn't appeal to me. I've seen what overindulgence has done to people and it's not a road I would ever want to go down. Some people can moderate their drinking just fine and it's NEVER an issue. And some people are drunks.
We know ourselves pretty well.....and we were little credit card winos if given the opportunity. We could justify purchases like you would not believe. We needed Jeff Van Vonderan to come tell us that our families loved us like crazy and felt like they were losing us. No joke.
Part of getting to a place of financial security is KNOWING YOURSELF. There's no shame in saying "You know what, I can't handle a credit card. Obviously." It's not a necessity for life.
So, at the end of the day, it's really up to you whether you want to involve credit cards in your financial plan or not. My take (read: the Total Money Makeover take, really) is not necessarily the most POPULAR route, obviously. You're going to have people that think not building a credit score is ridiculous. You're going to have people who live for building rewards. They have always done it that way and will continue to do so.
Not mad atcha!
This is just the road we've decided to check out. Who knows what we'll run across in the future. But, knowing that I won't be lying on the side of that road credit drunk and broke is kind of a comforting feeling.