It’s no secret that Dave Ramsey discourages the use of credit cards. And I get it, credit cards can lead to financial issues for some people; however, the issue is really not with the credit card itself. People struggle with credit cards because they don’t use them appropriately, which is exactly what creditors hope for. I’m here to share with you what NOT to do with a credit card in hopes that you can use credit cards to your benefit rather than putting yourself at a financial disadvantage.
Do Not Use Your Credit Card Like a Debit Card
A debit card is directly linked to your bank account, meaning you can only spend the amount of money that is in your checking account (ignoring the concept of overdraft because one should never utilize overdraft as a tool). A credit card, on the other hand, has a limit that is likely much higher than the money you have in your checking account. So, by maxing out your credit card, you are most likely putting yourself in a hole that you will have a hard time digging yourself out of.
Do Not Charge What You Can’t Afford
Expanding further on the point above, having a credit card limit of $20,000 does not mean you can afford to charge $20,000 worth of things. Determining how much you can afford to charge on your credit card is more than just looking at how much money you have in your checking account. The money in your checking account is likely also going to bills that can’t be paid via credit card, such as a mortgage or rent, utilities and car payment. You should also never think of your savings account as money that can be used to pay off your credit card, unless that money is specifically set aside for that purpose.
Do Not Carry a Balance Month to Month
According to a survey conducted by CreditCards.com, approximately 47% of Americans have credit card debt. Credit card companies make their money on the people who carry a monthly balance. They want consumers to have to pay interest. They want consumers to charge things and take a long time to pay them off. A credit card is basically just a loan with really crappy terms. By paying off your credit card in full, you are able to take advantage of all of the perks of credit cards.
Do Not Pay Just the Minimum Payment
Paying the minimum payment on your credit card causes you to pay significantly more money, due to accumulating interest, and take significantly longer to pay your debt down. If you are unable to pay your credit card off in full at any point, pay as much as you can in order to avoid paying an excessive amount in interest. Bankrate has a great tool for calculating credit card payments and interest, including the length of time it will take you.
For example: let’s assume you have a $1000 balance on your credit card, with 20% interest and a minimum payment of 2%. It will take you 195 months to pay off that original $1000 and you will end up paying $2,165.15 by choosing to make only the minimum payment.
Do Not Pay Late
Even worse than making just the minimum payment is making that minimum payment late. Late payments on credit cards are usually associated with some sort of late fee, the fee amount differs depending on the terms of your credit card. Paying late causing you to both accrue interest and pay a penalty all because you purchased something you couldn’t truly afford in the first place.
Credit cards can be a great tool when utilized correctly. Credit cards are a great way to build credit history and increase your credit score. Rewards from credit cards can serve several purposes. Those rewards points can be applied as cash to your credit card balance, turned into a vacation, used to purchase gift cards and much more. My husband and I have been accumulating rewards points for quite some time and even view it as an unconventional emergency fund. But if you truly do not think you have the financial self-control and discipline needed to utilize credit cards only to your benefit, it may be better to follow Dave Ramsey’s advice and not use them until you do.
