zenhabits : breathe

How I Ended My Love Affair With the Credit Card (and Why I Use Cash)


Every Tuesday is Finance & Family Day at Zen Habits.

Confession time: My name is Leo, and I’m a recovering creditcardaholic.

When I was just starting out in the world of adulthood, I shied away from credit cards. My parents had had some troubles with them, so I had a bit of a phobia. In my early 20s, I caved in and got a card, simply to build credit. It only had a $500 limit, and I pledged to pay off the balance every month. I did this for a few years, but for one reason or another, eventually let the balance creep up until I could no longer pay the balance every year. I then paid it off and canceled the card, out of pure fear. I went without a card for a little while, and then came the bad days.

I need to buy something important, and didn’t have the cash. I got a card with a $5,000 limit, and felt the fear creep back in. The first charge was well over $1,000. Then there were other large charges — expenses I wanted to pay for, but didn’t have the cash. I tried to pay as much as I could each month, but when I started having other expenses, the credit card bill wasn’t a priority. I could pay it later.

Fast forward to a couple years ago: I could no longer afford to pay my minimum balance on my card. I had other bills that were also out of control. I canceled the card, and worked out a payment plan. I struggled with my other bills until the beginning of 2006, when I started getting things under control. But I still had a Mastercard debit card, and I used this to buy stuff over the Internet. Since it wasn’t a credit card, that was OK, right?

Today, I am scraping by, but here’s the cool thing: I don’t have a credit card at all. Not even the Mastercard debit card. I am paying off my debts (the card should be paid off this summer) and things are looking much rosier.

My recommendation: if you have problems paying off a card’s balance each month, and have a hard time resisting impulse purchases, cancel your credit card. Today. They are a plague.

This point can be debated ad naseum, so I’ll just say this: do what works for you, but be very careful with credit cards. They are dangerous, and have caused many financial wrecks for many families. The best policy for many people, and you may differ, is to go without a card for as long as possible.

But how do I live without a credit card? Here’s how:

  1. I pay my bills online or through automatic deduction. It’s simple, convenient, and automatic. Hey presto!
  2. I use cash for everything else. Everything else? Pretty much. Once in awhile I’ll write a check, or use my debit card (it doesn’t have a credit card label on it, so I can’t use it online), but those occasions are rare. I withdraw cash for groceries, gas and “spending”.

What about online purchases? Exactamundo! You’ve hit the nail on the head. One of the biggest dangers of credit cards these days is that they make purchases so darn easy. Doing some research on how to pay off your debt? Hey, there’s a great book about it by Dave Ramsey. One Click(tm) and it’s headed to my door. Credit cards allow you to buy stuff, anything really, without having to think about it. And that’s dangerous.

So if I REALLY need to buy something online, I might ask a relative to order it for me, and give them cash. Obviously, this is inconvenient and you don’t want to do this too often and wear out your welcome. Which is why it works. Before I canceled my Mastercard debit card last year (about four months ago), I bought stuff online at the rate of about two things a week. Not exactly a spending spree, but it adds up to a lot over the course of a year. In the last four months, I think I’ve ordered one item. A reduction of nearly 95% of my online discretionary spending.

I could also pay using PayPal or similar methods, but I haven’t yet. The point is that it’s much harder for me to buy things online now (and to some extent, in the real world too), so I rarely ever do. While we might think that buying things online is necessary, in almost every case, it’s not. Buying online simply makes you spend more than you normally would. Take it from me, someone who is living evidence.

Using cash has other benefits. I can see at a glance (looking in my envelopes for each cash spending category) how much I have left in that budget category. That’s hard to do when you’re using a credit card. Sure, you could check your balance online, but most people never do this. Sure, you could update Quicken or Money, so you know your available balance, but this is much harder to do, especially if you’re away from home, and so many people guesstimate their balance when they’re on the road, and sometimes don’t even bother to do that. With a credit card, you can worry about it later. At a high interest rate.

This has been a hot topic in the last month or so on personal finance blogs, with people weighing in on both sides. I think it’s a highly personal issue, and different methods work for different people. See posts on this topic from Get Rich Slowly, No Credit Needed, and Digerati Life. All good posts.

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