We at TPG get dozens of tips and requests for stories each day. We can't tackle them all, but one popped into our inbox this weekend that I personally just couldn't ignore:
"I find great value in what you do. I was recently in a argument with another that in no uncertain terms said you were "full of it". The reasons he gave were based on a Dave Ramsey video. Can you please show where this course of thinking is wrong? It is good for all to be aware of both sides and not be swayed. Looking for your intelligent, informed argument."
This struck a nerve. After all, I'm a Dave Ramsey Financial Peace University graduate (2011) and prior instructor of the course. Yet I have 18 open credit cards and have generated over 2.6 million airline, hotel and bank points/miles from sign-up bonuses alone.
Before I virtually debate Dave Ramsey on credit cards, let me say this: I highly respect Dave Ramsey. His program has helped many people out of crippling debt. If you're in debt, his simple and effective 7 Baby Steps and Debt Snowball are great plans of action for getting your finances under control. But, that doesn't mean that I agree with him on everything. And credit cards is certainly one of those places where I disagree with him.
Dave's Argument
Dave Ramsey doesn't mince words when he talks about credit card debt:
- "There’s no good reason at all to have a credit card"
- "Responsible use of a credit card really doesn’t exist"
- "When credit cards stay out of your wallet, money stays in!"
- "There’s no positive side to credit card use. Even if you pay the bill on time, you’re not beating the system."
And, he famously carries a large pair of scissors around to events to dramatically cut up credit cards.
Instead of credit cards, Dave Ramsey instructs followers to cash out their paychecks and "assign every dollar a name" by dividing these funds into different envelopes (groceries, restaurants, entertainment, gas, clothing) for spending. He's not even a fan of using debit cards, arguing that "anytime you’re not using cold, hard cash with Uncle Benjamin looking up at you, you have a tendency to spend more."
And he's not a hypocrite when it comes to selling stuff on his website and at shows — Dave Ramsey's organization doesn't accept credit cards for any purchases (although it does accept debit cards).
My Rebuttal
On credit cards, Dave Ramsey is both right and wrong. But I understand why. For his audience, Dave needs to take a black-and-white stance on each issue and stick to it. If you watch his videos or read his materials, there's no room for debate. Either something is always right (term life insurance, paying cash) or always wrong (whole life insurance, using a credit card). There is no room for debate in Dave's dogma.
It makes sense for him to take firm stances on all financial topics when you consider his followers come to him for advice on a topic they're already overwhelmed about: finances. They come to him for simple do or don'ts. "Credit cards? Simple! Don't."
And, for Dave's core audience, credit cards are the wrong choice for one big reason: they can't control their spending. That's why they're in debt and in pain enough to seek out money advice from a crazy-sounding guy on the radio.
Indeed, spending with a credit card can lead to overspending vs. using cash — either due to availability of funds or ease of purchasing. Splurging every once in a while is fine if you can afford do to it, but Dave's target audience is in debt and needs to pinch every penny. So, it makes sense for him to insist on a cash-only system.
But that doesn't mean that credit cards are wrong for everyone, and that's where I take exception. Dave doubles-down on his "no credit cards" mentality, making wild claims to dissuade anyone from considering using a credit card:
- Point expiration: "Some points expire after 18 months, which is barely enough time to rack up a significant amount of rewards" and "A lot of cards offer points that expire after a couple years. It's kind of like your boss taking back a Christmas bonus because you didn't spend it fast enough." He conveniently leaves out the fact that most points expire after 18-24 months of inactivity. That's very different than if points and miles expired regardless of what you did.
- Interest charges even when paying your balance: "Two-cycle billing is when the credit card company averages your balance over two months and charges you interest for both, even if you paid one of those month's bills in full." This is still listed on Dave's website as the #2 reason not to get a credit card, even though the practice was banned by the CARD Act of 2009.
- Losing all points for missing one payment: "The fine print will outline several ways your points could expire. Did you know you could lose all rewards if you miss one payment?" No, I didn't. And in fact I've yet to run across a program that does this. He doesn't provide any examples of ones that do.
- Cash back: "This sneaky incentive sometimes comes in the form of statement credit—and not actual dollar bills." Umm, ok... But, that statement credit will reduce the amount of "actual dollar bills" you need to make your payment in full.
As an overall fan of Dave's, I'm disappointed in his claims, misleading comments and numerous straw man arguments made in an effort to dissuade anyone from using a credit card. But, again, I get the reasoning for trying to attack everything having to do with credit cards. After all, "Credit cards? Simple! Don't."
The truth is, there's nuance that Dave doesn't want to acknowledge. There's responsible use of credit cards and irresponsible use of credit cards. If you're going to use a credit card to overspend and go into debt in the pursuit of travel rewards, I'll also take a very clear stance: don't! Indeed, TPG's #1 commandment of travel rewards is "Thou shalt pay thy balance in full."
However, if you're able to responsibly manage your spending, there's no reason for you not to utilize credit cards. After all, no debit cards that I know about offer primary rental car insurance. When paying with cash, you aren't going to get the opportunity to apply for a difference in price when the item you just bought goes on sale, get a refund when your brand new Apple Watch breaks or replace your cell phone when it conveniently dies just outside the warranty. And a debit card definitely isn't going to reimburse $1,000 worth of travel costs when a typhoon wrecks your travel plans.
On top of all of those protections credit cards can provide, you'll accumulate credit rewards to earn cash back, free flights, free hotel stays, visit incredible lounges and/or earn a wide-range of travel rewards. Even business credit cards can rack up major point balances.
Dave Ramsey's argument not to use credit cards is both right and wrong. He's right that those that can't control their spending absolutely shouldn't get or use credit cards. However, his argument is wrong for those who pay their balance in full and utilize the rewards.
