A friendly challenge – Credit Cards vs. Cash Showdown

I’m a big fan of Ramit Sethi’s personal-finances blog iwillteachyoutoberich.com. It’s no secret that he spends everything on his credit card (paying it off every month) and is opposed to a cash-based budget. About 4 weeks ago, I read a transcript from a chat he conducted and found the following question and response:

Q: what do you think about not spending anything on credit cards? everyone else is in trouble so why not use cash only!”

A: that advice is not for smart people who read personal-finance blogs. i hate that ad-vice because it panders. it assumes, “everyone else mismanages credit cards, so you probably will too” ARE YOU A MORON I WANT TO YELL answer: no.

For the past few weeks I couldn’t get this statement off my mind. It’s one thing to have a strong position ;-). It’s quite another to insult those who follow a perfectly legitimate and arguably superior system of financial management.

To resolve this issue, or at least let the blog-reading community decide for themselves, I challenge Ramit to a good-spirited showdown: Credit Cards vs. Cash. Ramit can present the credit-card arguments and I’ll present the cash/debit arguments. The readers on each side can also chime in. I read a similar showdown about productivity a while back and thought it was useful.

Please leave a comment and let us know what questions or views do you have about credit cards vs. cash? What questions would you want to see addressed if a showdown takes place?

If Ramit accepts we’ll decide the terms, time, and format. Let’s have Ramit express his spirited feelings in a more articulate and useful way.

Posted in Budget, Budgeting, Budgets, Cash, Credit Cards, Debit Cards, Finance, Finances, Money, Personal Finance, Spending | 26 Comments »

26 Comments to “A friendly challenge – Credit Cards vs. Cash Showdown”

  1. Ramit Says:

    Heh, cool post. Yeah, that was a bit outlandish but it was a chat room with 150+ people. Plus, I like yelling.

    Anyway, I actually think this showdown is a great idea, but I’m swamped finishing up a big project for the next few weeks so I’m going to have to count myself out.


  2. NLG Says:

    First a caveat; I’m new to Ramit’s blog, so I’m not 100% familiar with his opinions on credit cards.

    However, from what I’ve read I agree with one very important statement on his site. Credit cards are a great tool to build a credit rating. If you don’t use them, as he says, the creditors will have no record of you.

    In my case, I graduated debt free, owning a house. Now I’m 26, have a generous credit card limit, and have never been denied a loan (I own 3 properties).

    I guess the bottom line in this argument is responsibility. You have to realize that carrying a balance on a credit card is a complete waste.

  3. Sarah Says:

    Ha! I like this idea. It’s like Crossfire, with less Tucker Carlson and more actual information. Hopefully Ramit will be able to take you up on your offer after he finishes his project.

  4. triple-e Says:

    I’d like to know Ramit’s take on Dave Ramsey’s stat that claims you will spend 15-20% more if you use credit cards instead of cash. My wife and I have done the use credit cards and pay everything off every month and get the x% cash back, but worry that sometimes we may be overspending this way.

  5. sjpeer Says:

    Unfortunately, it looks like the challenge either won\’t take place or will be delayed. Ramit mentioned he\’s interested but doesn\’t have time until the new year to give it the needed attention.

    In the mean time, please continue to leave your comments and questions on the issue.

    triple-e, I too would be interested in examining the statistics in more depth. I know there are industry studies claiming that the average credit card purchase is 3-4 times larger than the average cash or check purchase. I\’ve seen these statistics personally but can\’t seem to find them now. I\’m sure those stats are strongly related to specific industries.

    I know from personal experience that we\’ve spent significantly less using cash (I\’ll share some specific stats soon). Like you, we used to be on the use-a-credit-card-for-everything-and-pay-the-balance-in-full-every-month plan.

    Sarah, yeah I think a faceoff would be very useful. I think both ways of managing money are financially responsible (assuming you pay your credit card in full every month). In fact, there are some great advantages using credit cards in terms of convenience, reporting, etc. It was very hard for me to stop using a credit card, but now that I\’m used to it, I\’ll never go back. In any case, I\’m also not as hard-core as Dave Ramsey in my pro-cash, anti-credit card stance. I would sincerely like to do a fair, head-to-head comparison so that people can see the pros and cons of each system and decide for themeselves.


  6. triple-e Says:

    One more point. My wife and I are now focusing more on a budget, hoping that will take some of the 15-20% back , even though we will still use credit cards. We’ll try that for a while. And we may end up going to cash, if credit isn’t working. The thing that brings this up is we just cut to one income, so that my wife can stay home and raise our daughter. Before this we had so much “extra” money, that the savings grew on its own and the budget was easy to follow (and much bigger).

  7. joshuat Says:

    Credit ratings are only good if you want to borrow money.

    Dave Ramsey is my financial advisor :). So my opinion is similar to his – If you’re not going to borrow money, you don’t need a credit rating.

  8. sjpeer Says:

    joshuat, good point. I would still like to sort out once and for all how much having credit cards affects your credit rating. I\’ve heard it both ways. Some say the more credit cards you have, the better for your rating (assuming you pay the bills on time). Others say the less you have, the better for your rating. Does anyone know a good, official source for the answer?

  9. J.D. @ Get Rich Slowly Says:

    Ha! I noticed the same quote in the same transcript, and it’s been bugging me, too. I think Ramit’s got great advice, and has an awesome site, but I, too, think he’s off-base on this one.

    I mean, I understand his point, and I think it’s great that he’s trying to empower his readers, but even smart people can make dumb choices. In fact, the people I know who have the worst trouble with credit card debt are some of the smartest, best-educated people I know. That’s because finances aren’t just about logic — they’re also about emotion.

    It will come as no surprise that what I think is most important is to do what works for you. Know yourself. Know how you work. If you have trouble managing credit responsibly, as I do, then avoid it. I don’t use personal credit cards, and there’s a reason for that. My wife, on the other hand, carries several. She gets all sorts of perks from them. That’s great.

    I think this could be a fun debate. Come on, Ramit! Finish that book.

  10. sjpeer Says:

    Agreed. You need to do what works best. It’s always better to follow a plan than no plan, even if it’s not the most optimal one.

    It’s funny because one of the withdrawal pains I went through when I stopped using credit cards was that I lost my Borders points to get free books. I would generally accumulate $5-10 a month in free books. But by using cash we EASILLY saved way more than $5-10, so we could budget that amount for me to buy books every month and were still ahead.

  11. Poor Richard's Anorak Says:

    Getting Finances Done

    Link: Getting Finances Done. This looks like a helpful personal finance blog.

  12. Golbguru Says:

    It’s simple: Got discipline? Use credit cards :). For me it’s a no brainer. If you manage them well, you can turn the tables on the credit card company and squeeze every damn thing they have to offer. 0% offers, discounts, rewards, travel insurance, rental insurance, fraud protection and some more.

    You don’t get all that with cash. Credit score wise it can go either ways depending on how you use them, I have no particular experience on that matter.

  13. Kristian Says:

    IMHO it is not the credit card or cash but how you think about them. To me pocket money was extra, for fun. So cash in my pocket seems like it does not count. ATM or credit cards work for me. I hate fees and always pay in full and on time. My SO behaves like a credit card is a gift certificate that is going to expire. But he is great with cash.

  14. Scott Says:

    Credit ratings are only good if you want to borrow money.

    Let’s not get carried away here – credit is important for other things than simply borrowing.
    Credit checks are a standard part of the pre-hire background check process in the US now. Some car rental companies won’t let you rent without a credit card. The easiest way to check in at an airport is with a credit card. Other examples exist. The point is that it’s obviously unwise to binge on your credit cards, but going to the other extreme can be harmful too.

  15. Rebecca Beltran Says:

    “Credit ratings are only good if you want to borrow money” is like “Keeping your joints healthy is only important if you want to hike a mountain before you die.

    Maybe you don’t want to do it now, but are you so sure that you will never ever want to borrow money? That you’ll never want to buy a house? You won’t want to cosign an educational loan for someone you love? You’ll never have an emergency that is bigger than your savings account?

    Yes, you can get in lots of trouble with credit cards if you are not diligent. I’ve been there too.

    But used wisely, a credit card paid off every month can give you a lot of useful leverage. Besides getting free miles, rewards, etc, my husband and I are using a HELOC combined with a 25 day grace-period credit card that gets paid off every month to save us tons of interest on our mortgage.

    Basically we are leveraging the bank’s money to save us $236,000. We don’t even have to make extra or biweekly payments. (For details, check out Harj Gill’s book and website at http://www.mortgagefreeusa.com/Book/Book.html)

    Yes, it takes discipline but you can always start with a small limit until you can contol yourself.

    In my opinion, this leverage factor, when done right, is a strong argument for the use of credit.

    By the way, I’ve heard the optimum number of credit cards to have at once is 3, and each should not carry a balance that is more than 1/3 of the total limit.

  16. sjpeer Says:

    I appreciate all the great comments. There are obviously some pretty strong arguements on both sides. I would still love to see some references to exactly what affect credit cards have on credit scores etc.


  17. Emma Says:

    “It’s simple: Got discipline? Use credit cards 🙂 . For me it’s a no brainer. If you manage them well, you can turn the tables on the credit card company and squeeze every damn thing they have to offer. 0% offers, discounts, rewards, travel insurance, rental insurance, fraud protection and some more.”
    What is it that Dave Ramsey always says?..Oh yeah, “if you play with snakes you’re gonna get bit.” Haha. On a more serious note, I’m disciplined when it comes to money, which is why I don’t have a credit card.

    I did find I spend much less on things, especially groceries.

    “You don’t get all that with cash.”
    No, but I do get have money for retirement and savings. 🙂

    “Some car rental companies won’t let you rent without a credit card. The easiest way to check in at an airport is with a credit card.”
    A debit card works just as well.

    “Maybe you don’t want to do it now, but are you so sure that you will never ever want to borrow money? That you’ll never want to buy a house? You won’t want to cosign an educational loan for someone you love? You’ll never have an emergency that is bigger than your savings account?”
    You can still buy houses with cash last I checked. And pay for school. I think Baby Step 3 is a 3 to 6 months of living expenses, so yeah cash will work there too.

    Those convinced against their will are of the same opinion still.

  18. Adventures In Money Making Says:

    I use my credit card for everything I can.

    i get either money back or free books on amazon.

    the only time i paid cash was when negotiating for my incredibly expensive watch and i negotaiated a 34% discount in a shopping mall. when you waive a fistful of 100s in someone’s face, you’ll be amazed how much they’ll come down in price!

  19. Vicky Says:

    I just wanted to share my descovery (which may seem ridiculous for many people). I wanted to apply for a frequent flier credit card and hoped to use it wen travelling on business ( I have to go to far province, very small towns on business). But to my disappointment I found out that the card I chose has 20% APR for cash advance!!! And there are many places where I can’t pay in anything but cash!!
    Well, later I discovered that almost all the cards have high rates for cash advance.

  20. Karen Says:

    Successful cash only user here with tons of discipline. Credit cards are fine for those willing to deal with the hassles, but my life is much simpler without them.

    I own my house outright, the kids’ education investments are fully-funded, and car rentals have never been an issue. What’s with the car rental stuff? I hope you have a better pro-credit argument than that!

  21. sjpeer Says:

    Congrats on your success using cash. I agree that it simplifies things. I actually don’t track my cash spending because I know I won’t overspend so 80% of my transactions don’t require any accounting work.

    It’s understandable why people get so stuck with a credit card mentality. There is a convenience factor, but you can get the same effect using a debit card.

  22. Julia Says:

    Using a Budget/Cash is the only thing that has worked for us as a married couple. We see the money come in – and go out. My kids also see the value in it. Before our cash system – they would say things like “just use the credit card, mommy.” or “just us the atm card”. Now – they see that certain envelopes of money are designated for certain expenses. We’re still working on it – but we’ve come a long way! 🙂

  23. Liz Says:

    Credit cards are especially useful when traveling. They are more convenient and what’s more important – more secure. All credit card deals give you $50 limited liability for unauthorized transactions.

  24. Justin H. from Checks For Less Says:

    I think you need both the debit and credit cards for some of the reasons mentioned above. The bottom line is paying the credit card off every month and using the debit cards within a predetermined budget.

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