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

Wednesday, February 21, 2007

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

Every Wednesday will be Financial Tips Day, starting today.

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.

See also:


Anonymous said...

I like this idea, but how do you handle hotels and car rentals?

Leo said...

Well, basically, I don't really use hotels and car rentals. For reasons of frugality, I haven't traveled much in recent years. I do plan to travel in the future, though, so here's what I recommend:

1) it's not as common, but you can find hotels and car rentals that will make other arrangements; it may take some phone calls though.
2) try staying with a friend, relative, or someone else you know; they may even let you borrow a car if you offer to pay.
3) you might need to get a credit card to use only on these occasions; i recommend literally freezing it in a ziploc filled with water (perhaps wrapped so you can't read the credit card number through the ice), and only defrosting the card when you're going to travel. even then, don't use it for other purchases.

Anonymous said...

Here's an idea with online payments -- sell stuff on ebay, and use just that money via paypal to pay for things online. Last year, I went on a huge ebay binge, and I saved up quite a bit in paypal. It's my "fun money" to do whatever I want with (since I didn't really need the money for bills or anything, I needed some way to motivate myself to get rid of the clutter).

As for the motel, many places accept cash, but there is sometimes a caveat. I worked at a motel for awhile, and we would accept cash only with either a CC# or $100 extra deposit (so, pay for room upfront plus $100). When you checked out the next morning and we briefly looked the room over, we gave back the deposit. I don't remember ever keeping it, since it was only for major damage issues.

I use my CC regularly, but I do pay it off each and every single month. Then again, I'm not an impulse buyer. My bill is a touch higher than I'd like, but much of it is groceries/gas. I'm working on reducing the small bits of discretionary spending that add up over time on that bill.

Josh said...

I'm also working on paying off all of my cards, although most of the balance on these is medical expenses.

I don't know if I could do without my Visa-backed debit card. I don't particularly like carrying or using cash, especially because cash tends to slip through my fingers. With my card, I have a paper trail (through my bank) that tells me how much I spent and where. Of course, this could be remedied with a budget, but I've never really needed a budget because I'm not a big day-to-day spender.

Good post.

Anonymous said...

I agree that credit cards are a plague. However, I use a rewards (airline)card for every purchase so I can obtain miles for every purchase. I pay all of the purchases off on Friday and basically think of it as my checking account. I know that temptation is there, but discipline and fear prevent me from going over what I can cover with cash. The miles have provided my wife and I with great vacations which we would have never taken otherwise.

DEBTective said...

Great job, baby ... great post. Thanks for spreading the word about ditching credit cards and deep-sixing the debt that comes with them. When you're not throwing away dough at 18 percent interest, you have a thing called money. Way to go, jack! Let's get the word out! www.debtective.com

Leo said...

@leah: I love the ebay idea ... although knowing me, I would probably just use the money I made to pay off more debt. :) I think that if the credit card works for you, that's great ... it takes a lot of discipline. It doesn't work for the rest of us. My only caution is to not use it on something that you can't pay off at the end of the month -- perhaps a large purchase over a certain amount of money. But you seem good at that already -- and congrats on reducing discretionary spending.

Leo said...

@josh: congrats on paying down your credit cards. It's a tough journey for some of us, but a necessary one. As for the Visa debit card, I suggest examining your spending on it ... if there are a lot of discretionary spending, and you would like to cut back on spending (to save or invest), perhaps try doing without the debit card for a week and see if anything changes. It might make a big difference (it did with me).

Leo said...

@TJS: like I said, if it works for you, then go for it. However, not everybody has the discipline not to spend more than they can pay, when it's so easy -- and the problem comes when something urgent comes up and you don't have the money to pay for it. Which is why I'm developing an emergency fund now (instead of using the credit card as a backup). Congrats on the vacations!

Leo said...

@Debtective: you're right on about the 18 percent interest (some go lower, but it's still high). I actually meant to list all the things I don't like about credit cards, but the post was getting long already.

Anonymous said...

Thanks for mentioning my post on this even though it's a different view! Great post, I enjoyed it!

Anonymous said...

It's true. Credit cards can greatly affect not only your financial status but your entire life as well, if not managed properly.

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