There are very few people who can dispute the fact that credit cards can be dangerous to one’s personal finances. The fact that the average American household has nearly $16,000 in credit card debt in 2012 should show this pretty clearly. For that reason alone it would be pretty easy to just say that credit cards are evil and no one should ever use them. In fact, Dave Ramsey says that using credit cards is similar to holding a snake and no matter how good you are with them eventually they’ll bit you.
There was a time when I shared Dave Ramsey’s opinion. About three years ago we even used his advice to climb my way out of debt. With only 20% of the debt remaining we were pretty close to having no consumer debt. Then one December day all of our hard work began to unravel.
December 2011
It was a stormy day in early December. For a period of seven or eight hours rain came down in nearly horizontal sheets. When I had left for work that morning everything was perfectly fine in my house. However, when I returned home from work there was a puddle in my bathroom and in my basement. Apparently there was a leak around my bathroom’s vent stack and the water had driven itself under the roof shingles. There may have been more vulnerabilities in my roof, but I didn’t waste any time and had a roofer out the next day.
We had three bids for the roof and chose the contractor that my wife’s aunt had recommended. Everything with the contractor went fine. We had the entire roof ripped off and replaced the gutters. When it was time to pay for the roof the problem arose.
Our $1,000 “baby” emergency fund that Dave Ramsey recommends you have while paying off debt was not enough to cover the costs. We also didn’t qualify for any type of home equity loan and the bank of “mom and dad” was not an option. So….we had to charge it. I felt pretty lousy about charging the credit card for two reasons: A.) We were almost out of credit card debt. B.)The contractor didn’t add the transaction cost for running cards to the cost of our roof and it ate into their profit. ( I know that most people wouldn’t worry about something like that, but I really didn’t want him to lose money on the project. If we had been able to pay cash he wouldn’t have had to pay the transaction fee).
No Financial Planning
At first I was pretty upset because I had used credit cards. At this point in time I had believed them to be shackles of financial bondage. However, when I reflected upon my situation I knew that the credit cards were to be at fault. Truthfully they weren’t to be blamed for any of my consumer debt. We had never used credit cards to cover our daily purchases.
There were only four times when we ever used credit cards; savings/rewards, online purchases, hotels, and emergencies. We always paid the card off in full the day after the purchase. Can you guess the only times we couldn’t pay the cards off in full? If you said when we used them for “emergencies”, you’re right! Car repairs, required house maintenance (burst pipes, leaky roofs, nothing cosmetic) and other unexpected expenses would go on the credit cards because we couldn’t afford the cost of the emergency.
The credit card debt wasn’t coming from living beyond our means in the traditional sense. We were accumulating the debt because we were not planning ahead. There was no budget in our household. No saving for emergencies or squirreling away money for inevitable expenses like the roof.
Financial Planning
In my situation it was not the credit cards that led to our using them. The problem for us was not having an emergency fund. Up until about five years ago the idea of an emergency fund had never sunk in. The concept of having a financial safety net was not something that my wife and I were ever taught. Perhaps our parents and the school systems believe that having an emergency fund is common sense, which I guess it should be. However, my wife and I were walking the financial tightrope without a net. If we had slipped the splat would have been pretty loud.
Not planning ahead of life’s uncertainties is another reason for our credit card debt. We should have had a budget with categories for car and household maintenance. I knew that the roof was going to start leaking. When we had our house inspected before purchasing it the inspector said that we had four to five years left on it. Guess what happened. As if right on cue during the fourth year the leaks started. If we had budgeted $125 every month for the roof there would have been no need to use credit cards to purchase it.
My Take on Credit Cards
Some people who find themselves in my situation may find it easy to blame credit cards for their debt. There may have been a time when I would agree with them. However, after sitting down and really looking at my financial past I would say they did not cause it. The lack of a safety net and not budgeting for the inevitable is what led to my situation. I believe that for some people using credit cards wisely can help out.
Credit cards are a tool that need to be used with respect. If they are paid off at the end of every month the discounts and rewards can help stretch your money. But using them as an emergency fund is an easy way to find yourself buried in consumer debt.
Have you ever been buried in credit card debt? What lead you down this path? The lack of an emergency fund? Not planning? Or using them as an extension of your paycheck?
For those of you who think that I could have patched the roof, it was beyond repair. It was the original roof with three layers of shingles on them. Patching it would’ve done no good because it would have became a monthly occurrence.
Photo provided by: 401 (K) 2012
I feel terrible for people who have struggled with credit card debt, but when used responsibly you can get a ton of cash back rewards. I really can’t say that credit cards are inherently bad.
DC @ Young Adult Money recently posted..Resale Value and other Considerations When Buying a Home
No. It’s the lack of a person’s financial knowledge that get’s people in trouble. Well that and sometimes a lack of self control is involved too. Cash back rewards can be a great way to get a little bit of extra money from your budget.
I don’t think you can blame the card the same way you can’t blame McD for fat people. Everyone is responsible of his acts, and yes, companies use sneaky ways to make you think the card is convenient and you should worry later about the money and pay a lot of interests in the meanwhile. But like alcohol, smoking, or any other vice/addiction, people got there by themselves. I wish financial education was mandatory at school though.
Pauline recently posted..How to negotiate your bills and your debt
Sometimes people don’t want to take responsibility for the actions that they have taken. My ignorance of not having an emergency fund was my fault for not becoming financially literate sooner. While I do believe that being taught financial literacy school is very very important, I can’t blame the Credit Card companies for the choices I made.
I don’t know that I would “blame” credit cards for debt, but I think they are part of the problem. There are a lot of things that I love about technology and the internet (keeping up-to-date on my bank balance is very easy now) but one thing it makes very, very easy is to spend money. You can buy stuff online, over the phone, and use a variety of ways of paying (credit cards, debit cards, automatic withdrawals, etc.)
I used to think that I should just be able to resist temptation; that was kind of a mistake. Once I realized that I am not a paragon of discipline, it kind of freed me to figure out strategies that helped me to refrain from using credit cards or shopping to excess.
So. . .I don’t think credit cards are inherently bad. I do think they make it very, very easy for us to spend money we wouldn’t normally spend.
Pamela recently posted..Sew I’ll do a project
You’re right. It’s so easy to spend money with technology. Before the internet you had to actually go out to the store to spend money. If you were to lazy to leave the house you didn’t spend money. Now you’re constantly being bombarded with deals. Luckily for myself that isn’t an issue, but I can see where it could be for some.
I don’t think you can blame credit cards either. I fault them for some of their predatory marketing (like on college campuses to uninformed students) but once we get the card I think the onus is on the person. When I got into cc debt it was entirely because I was living well beyond my means.
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You should be required to take some type of debt management class in high school/college. I think that if we all learned what we were signing up for we’d either be smarter about it or forgo it all together.
I couldn’t blame my credit cards for allowing me to charge upwards of $50k for starting and running a business. I had to blame myself for the lack of knowledge. People are presented with the ability to use a credit card to purchase something that they might not be able to afford, and all they have to do is slowly pay it back with a minimum payment. Few read the small print on how long it will take to pay that card back.
I now use cards responsibly and get the rewards for doing so. I also now that credit cards can be there for an emergency. If I might not have enough money in my account to cover the cost of an emergency, I can use the card and then it gives me a little more time to secure the funds to pay off the card. I use them as a safety net.
Grayson @ Debt Roundup recently posted..Students: How to Finish College with No Debt
Knowledge is power. People see the small monthly payments and think oh I can afford this. In the end they may pay twice the original amount.
When my wife and I got married we had $52,000 in consumer debt, I want to say about $10,000 of that was credit card debt. I would attribute it to not having a plan and growing up in households that made poor financial decisions. We thought using a credit card and being in debt was a part of life. We soon figured out that we didn’t have to live that way and when we got our act together, we were able to pay it all off in 18 months!
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Having a plan is key to financial success. For most financial independence is not something that just falls into our laps. We must learn, plan and work for it.
I have often thought about the 1k E-fund. It does seem a little small for big emergencies, but the idea of it is accurate. Interest is usually high on debt therefore it makes sense to spend your cash to pay that down. That being said I prefer the 3 month expense fund idea in case it really hits the fan and you lose your income.
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The $1,000 would have been fine for us if we didn’t need a new roof. But that’s just the problem. You never know when you’re going to need your emergency fund. Now I pay the min on the cards and then split half in emergency fund and half on debt. That way if big happens we shouldn’t have to start completely over.
I think you know how I feel about this =) Credit cards are not the problem. People who use them irresponsibly are the problem.
Holly@ClubThrifty recently posted..How Much Money Is Enough?
Yes Holly. Your views and experiences show that restrained credit card usage can result in financial gains. I loved your post on using the sign up perks in your guest post on Get Rich Slowly and have slowly started to think about using them in the future once my debt is cleared up.
Agree with Pauline, credit cards should be treated as nothing more than a financial tool. Unfortunately, many young Americans, including myself, get into big trouble when they use cards as “free money”. But I’ll tell ya what, getting in, and then out of debt was my one of greatest challenges and one of my greatest accomplishments.
Kyle @ Rather-Be-Shopping.com recently posted..Shopping Online? – My 5 Best Couponing Tips
Yes. That final payment is like having the chains removed. Every time we pay off a card or some other debt it’s an exhilarating feeling. Once we get this last one cleared up it will be a whole lot less stressful for us.
I had terrible credit card debt when I was younger. For me, it was just the accumulation of little purchases – coffee, clothes, and other crap. Best day ever when I paid it off! Now I only charge things I have money to pay for (to get points, of course… )
Having an emergency fund is definitely the best way to deal with this type of situation.
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Yes. Emergency funds are not sexy, but having them there when the water gets rough is very comforting.
It’s hard to look by on my entire history, but I know in recent times any time I’ve used it was both for emergencies and for stupid purchases. Now I have a grip on things I know that I have a decent E fund, but trying to grow it, and cross my fingers no big emergencies come up where I’d have to put it on the card.
Budget and the Beach recently posted..Big Things Await
Big emergencies are the worst. Even when you have an emergency fund they can suck, but if you don’t they can throw your entire life into chaos.
I think they can be pretty dangerous because they allow you to regularly live beyond your means in a way that’s not possible without them. You can do it for years before feeling the pinch because of how low the repayments can be compared to the balance. Then you’re hooked on a higher standard of living and from there it can be pretty hard to recover from.
Of course credit cards don’t spend money for you and don’t jump out of your wallet and do damage unannounced, but they require very careful use which most people can’t do.
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Yes you’re right. There is a temptation factor of having credit cards. People who cannot fight the temptation and live beyond their means should not have credit cards. But for people who use them responsibly and have an emergency fund they can be a useful tool.