Years ago, before my husband and I had children, we had debt. Lots of it.
We had the mentality that if we could afford the minimum monthly payment, then we could afford to purchase the items we wanted. We drove a very nice, brand new truck with a $400+ payment because, well, we could afford the payment.
Then we found out that we were expecting a baby.
We were in debt, still renting, and not in the best financial position to be caring for another human being.
At my dad’s suggestion (thanks, Dad!), we went to a credit counseling service. They told us that if we never charged another penny and continued making the minimum monthly payment on all of our cards, it would take us 30 years to pay off our debt!
That was the wake-up call we needed.
We handed over our statements, did everything they told us, took every budgeting class they offered, and paid our credit card debt sooner than we had ever imagined. It wasn’t easy. We moved in with my husband’s parents, he got a second job, and every single dime went to paying off those cards.
You can imagine our surprise when upon graduating, our credit counseling service told us the first thing we needed to do was go get credit cards so that we could rebuild our credit.
We were shocked, and frankly, terrified. I never wanted to touch another credit card as long as I lived after what we had just gone through.
We did, however, follow their advice. We got a credit card, charged a small amount each month, and always paid it off early.
Years later, we found ourselves with another child and a mortgage. You can imagine my fear and trepidation when my husband came home from work one day and told me that his business partner charges all of his monthly expenses on credit cards, pays the balance in full each month, and receives cash rewards (thanks, Rick!)
The thought of that frightened me, but I agreed that we could give it a try. I was already using Quicken to track our spending, expenses, etc. I continued to track our credit card spending as if we were using cash.
There is a great debate out there regarding the best financial system.
Many people shun credit cards completely, working on a cash only system. They propose that spending cash is much more concrete than swiping a card. In other words, handing over green cash is harder so you are likely to spend less.
They also suggest that you are more likely to blow your budget when you charge rather than pay cash because once the cash is gone, it’s gone. Credit cards allow you the option of overspending.
They propose that many people do overspend as a result, and they are probably right. Many financial planners teach that the need to build credit is a myth, and that one can be an active participant in society without credit.
It has been more than ten years since my husband and I started paying for everything possible with credit cards. In that time, we have made money that we wouldn’t otherwise have had we been using a cash only system.
I don’t believe that we overspend because we don’t charge anything that we don’t have the cash in the bank to cover. We spend only what our budget allows because we treat our credit cards as if they are cash. We have never paid a late fee or one cent of interest.
For us, the system works well because we don’t use credit cards to purchase things we don’t yet have the money for. Nothing goes on the card unless we know how and when it will be paid back.
I think that this issue is an individual one.
The decision needs to be based on how well you know yourself. If you are self-disciplined enough to purchase only the things you can afford and stick to your budget when you are shopping, then credit card rewards can work in your favor.
You need to keep in mind that messing up, just once, can more than take away any advantage these cards may give you. You can be sure the credit card companies are banking on the chance that you will.
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What do you think? Leave a comment and let us know if you think you spend less because you use cash, or do you think the benefits of reward cards outweigh the risk?
Shared at The Retro Re-Pin Party.