Before you read this post I need you to promise me you won’t show it to Dave Ramsey. Seriously, he will write me off completely and it will break my heart.
If you’ve been here before you know we used Dave Ramsey’s Financial Peace System to get out of debt. We took his advice as gospel and followed everything he said.
I even gave in and….wait for it…..cut up my Target RedCard?!?!? I mean, what kind of plan requires you to turn your back on your red-shirted-khaki-pantsed family? But I digress…
Dave Ramsey’s Rule
I know many people have a difficult time with the part of Financial Peace University questions asked and NO exceptions. Let me clarify, I do agree with his advice and I do believe that his system works and when a system works one of the worst things you can do is deviate from said system thinking you know better…
But I don’t know better, and I do think that Dave Ramsey is a genius and he has completely changed our lives. That being said, I have a confession to make….we have modified his credit card policy slightly.
The Great Credit Card Debate
1) Use your credit cards for expenses and pay them off each month, avoiding any interest charges while also possibly earning various rewards and/or cashback.
2) Cut up all your credit cards, pay them off in their entirety, close every account, and never open another credit card account ever again as long as you live; cross your heart and hope to die.
But for us, it hasn’t been so black and white. We have fallen into somewhat of a grey area. When we went through Dave Ramsey’s program the thought of closing all of our credit cards scared me half to death.
They were our fallback, our security blankets but the problem is they actually offered a false sense of security and in turn pushed us more into debt.
We Decided to Cut Up All of Our Personal Credit Cards, Except for One
We left one card open and active that we have had for 10+ years. This was a tough decision, and while we hope to close it at some point in the future we decided to hang onto it for now.
When you do the Financial Peace University program you will keep only $1,000 saved as an emergency fund. We kept that separate in another account so it wouldn’t be used, so our checking account was virtually drained each month after paying the bills.
We have a couple of monthly bills that were paid automatically on that credit card each month and while we switched all of our spending to a cash envelope system or our debit card, I was worried to switch the auto-pay bills to the debit card as well.
One of the reasons we used to use our credit cards for all expenses is because it makes it so much easier to balance your checkbook at the end of the month.
When we use our debit card for all spending we have pages of charges to reconcile each month, which leaves more margin for error in our checking account.
My concern was that the empty checking account coupled with that extra margin of error created the perfect opportunity for me to forget to record an auto-withdrawal and overdraft our checking account (technically it would just pull the extra from our emergency fund in our savings account, but it gets messy and my OCD doesn’t like that).
We also use it for our gas. This is important to us for a few reasons…first of all, ain’t nobody got time to go inside the store and pay cash?!?!? And secondly, our credit card was compromised twice at the gas pump.
And while VISA check/debit cards do carry the same fraud protection as actual credit cards do, you must use the debit card as CREDIT for those rules to apply and I don’t know about you, but I always forget to run it as credit instead of debit.
And while I know it’s dramatic, I really worry about someone cleaning out the little money we do keep in our checking account at this point in our journey.
You Use Your Credit Card but You Pay it Off Every Month
If you are able to drastically change your habits and really manage your spending then I totally understand why you might continue your use of credit cards as they are super convenient! I do believe there is such a thing as using credit responsibly.
The problem is (and this is why I say we might close our last card at some point in the future), and I’ve mentioned this before, is that you just don’t feel the spending when you use credit so you often spend easier and more often than if you’re using cash.
Whether you’re paying it off all at once or incurring interest, you usually don’t keep track as closely as you do when that money is being taken directly from your account. And it’s very easy to start slipping and before you know it, your finances are in distress again.
But What About All Those Rewards and Airline Miles?
Credit card perks can be super enticing. I’m a sucker for a deal, but here’s the thing (and you’ll hear Dave Ramsey say this a lot)…you ask any wealthy person you meet how they got where they’re at and you will never have them tell you that using credit cards to get cashback made them rich.
It’s true, I mean we all love free stuff, but you always have to look at who’s offering you that deal, and more importantly, why?
Credit cards are a billion-dollar industry.
Trust me, they are not in business to offer you double points at the grocery store or help you earn free flights so you can travel the world.
The points are an extremely effective marketing strategy to get you to spend a crapton of money on their cards and pay them a buttload of interest in the process. So go ahead, earn your points, fly the friendly skies, but please…proceed with caution.
Get Out of Debt
If you have credit card debt today you really need to give some serious thought to cutting up those cards. It can be a tough pill to swallow but it is going to be incredibly difficult, if not impossible, to get yourself out of debt if you continue to use credit cards.
The only way to tackle that debt is to stop spending and pay it off as quickly as possible using the debt snowball method. Get on a budget ASAP and be sure to save your emergency fund to help you to stop relying on those credit cards as your backup plan.
WHEN WILL YOU BE DEBT-FREE?
If you prefer a digital way to track your debt, this Debt Snowball Calculator is a great tool to help you get out of debt and reach your financial goals. You can track all your debts: credit cards, auto loans, mortgages, etc., and can be used as a debt snowball tracker or a debt avalanche tracker. This debt calculator is completely customizable and will calculate the exact date you will become debt-free (Instant digital download can be used in Google Sheets or Microsoft Excel).
Be Sure to Have a Plan
Maybe you’re not in debt (way to go) maybe you’re actually in pretty good financial shape and you effectively use and manage your credit without any issues….that’s is great and considering over 38% of Americans carry some amount of credit card debt, you should honestly be pretty dang proud of yourself! Maybe you could teach the rest of us a thing or two.
But if you’re not as fortunate, maybe you’re still blindly swiping blissfully unaware of the chaos around you. Maybe you have a very clear picture of your finances, and it’s not looking so good…
Now we keep a very close eye on our credit card spending. We allow a few things only on that card and it is paid off immediately from our account as soon as the charges post. We have agreed to the charges that will be put on the credit card and do not deter from that plan.
Because we have worked so hard to make major changes in our money mindset and track our finances, we are confident that we will not fall into old patterns with credit card spending.
Turn Things Around
Stop using the cards immediately and cut them up!
Call and close the account. If you skip this step the account will still remain on your credit report even after it’s paid off. If you have great credit then closing it shouldn’t affect your score much. We closed many of our accounts and our scores are still super high.
If you don’t have a great credit score or are working to improve your credit score, pay off your cards, and cut them up if you’re at risk for running up the balances again but don’t close the accounts as it can drop your score even lower.
Switch to debit cards. We already had a debit card through our bank account, so that was an easy switch for us. It takes some getting used to, but we’ve made it through alive.
Another thing we did was finally give in and sign up for a Target RedCard but the debit card, not the credit card (that little guy went to heaven). I refrained for a few months, especially since I’ve greatly curbed my Target addiction, but I felt like a piece of me was missing and I really liked the extra benefits the REDcard offered.
Even though saving 5% is not a ton, the sales tax here in PA is 6% so it makes me feel as though I’m shopping tax-free (almost)! Plus, I love the free shipping.
Before I had a RedCard I used to always buy extra items to get my shopping cart to $50 for that free shipping! I have a personal policy to avoid shipping charges whenever possible so I found myself justifying extra purchases just to avoid those shipping charges, which is counterproductive…
The REDcard debit card has the exact same benefits as the credit card…you can order anything and it’s free shipping…always. It’s really great because I often want to order smaller things and don’t have to pay for shipping on anything.
They also have extra perks such as early releases or sales for Redcard holders only, so this way you can get all the benefits the RedCard has to offer and none of the interest. Don’t forget to combine those benefits with Cartwheel for some extra savings.
What are your credit card habits? Have you cut any cards up to try and get out of debt? I’d love for you to share your credit cards philosophy with us!
Kristin Stones is the owner of Cents + Purpose, an online community dedicated to sharing practical personal finance content. Her mission is to equip women with the necessary tools and knowledge to take back control of their money and live a more purposeful life. She creates actionable content to help her audience achieve financial wellness using her simple approach to managing money - all learned through her personal experience of paying off almost $55,000 of debt in under two years.