Fairly Ordinary

In the comments on the last post, a few of us began discussing the pro’s and con’s of credit cards as well as what Dave Ramsey’s teachings seem to say about credit. I decided to gather my thoughts a bit and write a post about my current stance on credit cards and what Dave’s teachings say about it all.

I’m not one of those financial guys who think you ought to live in a cave, collect lint, and only come out on Triple Coupon Thursday.

- Dave Ramsey

It’s been pretty evident to me throughout Financial Peace University that this process of getting out of debt, learning how to make wise financial decisions, and building wealth is not just about selling everything you have because Jesus likes poor people better and come on really, you do not need those Gucci shoes and that frappcuino. It really is okay to have nice things. We just do not need to be owned by those nice things. And perhaps, just maybe, it is better to get nice things by working hard and paying cash instead of using what is often considered the “convenience” of credit cards. I don’t personally think credit cards are evil or sin (and nothing that I’ve read in Dave’s teachings have made me think that as well) but I do think they are unwise.

Some folks carry just one credit card with them and then others wallets have VISA, Discover, MasterCard, Banana Republic, and ten other stores. Or more. Some folks use the cards for the rewards and responsibly pay them off each month. Some do ALL of their shopping and gasoline purchases on credit. Some just use it for hotel reservations. I think it’s safe to say that everyone has their personal standard for what they consider credit card worthy.

Stores, banks, and major credit card companies are making it exceptionally easy to sign up and when you can get 15% off of your purchase - it’s sometimes hard to say no. The rewards that are offered are everything from airline tickets to cash back. Living with credit cards is just the norm and for me to raise my voice slightly and say that I think it’s unwise to use them at all is rare.

I’ve read Dave Ramsey’s The Total Money Makeover, Financial Peace Revisited, and have just recently finished the 13 week course of Financial Peace University. I’m not an expert by ANY MEANS. Daniel and I are still working the baby steps, and so I am clearly stating that I’m not here to give financial advice because I’ve done it and I’m now a millionaire. :) One day I might say that, but not right now. But what I can tell you is what I’ve learned from all the reading and research that I’ve been doing for the past four months and then what my personal thoughts are about it all.

My first learning curve was getting over the realization that perhaps I’ve been believing a lie in regards to debt for a long time. A lie that my great-great-grandparents did not swallow because they probably believed that debt was horrid as home-made sin.

History also teaches us that debt wasn’t always a way of life. In fact, three of the biggest lenders today were founded by people who hated debt. Sears now makes more money on credit than on the sale of merchandise. They are not a store; they are a lender with some stuff out front.

However, in 1910 the Sears catalog stated, “Buying on Credit is Folly.” J. C. Penney department stores make millions annually on their plastic, but their founder was nicknamed James “Cash” Penney because he detested the use of debt.

Henry Ford thought debt was a lazy man’s method to purchase items, and his philosophy was so ingrained in Ford Motor Company that Ford didn’t offer financing until 10 years after General Motors did. Now, of course, Ford Motor credit is one of the most profitable of Ford Motor’s operations. The old school saw the folly of debt; the new school saw the opportunity to take advantage of the consumer with debt.

- Dave Ramsey

Between the generations of my grand-parents and my parents, the birth of the first credit card occurred with the story of Frank McNamara. In 1950, he came up with the idea of a single card that could be used at different restaurants in New York City. It was called Diner’s Club. In 1958, Bank Americard (which later became VISA) started and so did American Express.

But still, the users of these cards were among the elite jet setters and and business men and women. The average Joe and average Jane still paid cash for plane tickets, hotel rooms, and any new goodies they wanted. “Credit” was certainly an option but it involved “going to the bank, talking to the lending officer, and proving you were a stand-up guy.”

But as the memories of the Depression slipped by, folks frankly just wanted to spend money. “Thrift is now un-American,” declared FORTUNE in 1956. And the next 10-15 years was full of credit cards being introduced to the middle class in a massive campaign. By 1970, the volume of credit card debt has reached $7 billion and with volume came a bundle of trouble. Delinquencies, credit card crime, errors, and fraud.

In 1973, Dee Hock, the CEO of VISA introduced the electronic credit-card processing system. It was somewhat primitive but was a great improvement and with his pursuing of over a million merchants to accept VISA, the credit card industry began seeing change. By the early 80’s, the industry had started making money (banks started learning that applications and credit checks really matter) and things started to simply take off.

And now our generation is simply swamped with credit cards. Last year over 6 billion credit card offers went out and over 18 million accepted.

Once again, credit cards themselves are not evil. But my believing that debt is a privilege (Oh, Mrs. Bergey, you have been approved!) and not a product has been my delusion.

The marketing departments of these huge credit card companies (and banks, too) are doing a Remarkable Job! We are rushing in and begging for acceptance and oh may we please have one of your pretty cards with a nice sunset or maybe even Hello Kitty? And could you up the balance because Christmas is around the corner? They have successfully encouraged us to believe that debt is necessary to exist and is necessary to prosper and that we end up thinking we are really something if we get approved.

~

Proverbs 22:7 states “the rich rules over the poor, and the borrower is servant to the lender.”

For a lot of us, we finish school, get married, and have debt up to our ears. Our school loans, car loans, and bad habits of dropping by Banana Republic a little too often are causing stress but we ache to keep up with our friends. And then when someone raises their eyebrows about the fact that we haven’t bought a house yet (because renters go to hell, as Dave Ramsey jokes), we start looking for that cute house with a white picket fence that we can stuff full of furniture from Pottery Barn, Pottery Barn Teens, and Pottery Barn Kids. And Lowe’s and Home Depot. And Apple. Duh.

And sometimes, surprisingly, a bank DOES offer us a loan to get that cute house and we swing through the front doors of the bank praising God that we live in America where anything can happen and thank you Jesus! All the while not realizing that we are trying to achieve the same standard of living as our parents. Only it took them over 30 years to get there.

With the new bills comes new stress, and unless you are blessed with a gloriously large income and have no budget problems, I’m sure you know how financial stress can affect a family. 52% of the marriages in America end in divorce and of those that divorce in the first 7 years, 90% of them say money problems were the root of their issues.

The borrower really IS slave to the lender. Whether we like it or not.

But for me, I’ve just always assumed that there was really no other way to live. And here is where I’ve realized that I was wrong. So beautifully wrong. :)

Here are a few of the myths that are commonly tossed around in regards to credit cards:

* You need a credit card to rent a car or to make purchases online or by phone.

Thankfully, a debit card will do all of those things except for a couple of rental companies. I always check ahead. For those concerned about the theft of a debit card, VISA offers a zero liability policy that says if your debit card is swiped then you are refunded any costs. If you tape your pin number to the back of the card (I’ve seen this done!), then a thief will be able to use it as an ATM card and those fees are not refunded. Just be wise.

* I pay mine off every month with no annual fee. I get brownie points, air miles, and a free hat.

Once again, these credit card companies are amazing. They make it seem so fun. This Discover commercial is the type of the thing that catches stay-at-home-mom’s like me:

But a recent Dun and Bradstreet study found that when you use a credit card instead of cash, you spend 12-18% more because spending cash psychologically hurts. So even though you might get freebies for using credit cards, you end up spending more with just your regular purchases.

McDonald’s also found this interesting and chose to begin accepting credit cards. The average transaction rose from $4.50 to $7.00 when customers paid with plastic instead of cash.

And although airline miles are a really sweet deal, it only makes sense if you use them. 75% of airline miles are never redeemed.

* My teenager needs to establish good credit and learn to be responsible with money. I’ll make sure they handle it well.

Credit card companies have realized that they’ve saturated the market and so they really are interested in your teens. College campuses often have free pizza and free-shirts available to any teens who sign up for cards. They are not making mistakes in marketing. It’s not a game to them.

In the FPU course, Dave Ramsey talks about how Junior Achievement did a study called The Case for Economic Education and discovered two things: More young adults filed bankruptcy than graduated from college last year, and colleges are telling them that they are losing more students to credit card debt problems than to academic failure. So when your credit card balance sky rockets you decide to quit school to go home and work to pay it off but then your student loans are activated six months later (because you left school) and you don’t have an education to get the better job to be able to pay the student loans. It’s an awful cycle.

These credit card companies want to establish brand loyalty at an early age. If that still sounds bizarre to you, take a look at this:

Awhile back, Mattel released Cool Shopping Barbie which was sponsored by MasterCard. She had her own MasterCard that when swiped on the tiny cash register said, “Credit Approved!” There was so much consumer backlash that Mattel pulled the product. After Christmas.

A couple of years ago, Parker Bros. got the same idea and issued new versions of Monopoly with VISA credit cards instead of regular Monopoly money. There was some fuss from consumers but credit is more acceptable today (okay, it’s more LOVED).

Both of these examples show a wise marketing campaign to get young children used to seeing credit cards, famous brands, and to establish a loyalty of sorts. Once again, I can’t stress enough that I am not screaming at the companies - I think they are doing their job of marketing very well. But I do not want Drew to grow up thinking that credit cards are what you have to do nor do I want him to think it’s perfectly normal.

* Another myth is that debt is simply a tool and that it can be used to create prosperity.

One of Dave’s stories is that when the Forbes 400 (400 wealthiest people in America today) were asked what is the most important key to building wealth, 75% answered that becoming and staying debt free was the number one key to wealth building. That doesn’t mean that they never used debt in their life or didn’t use rewards from a card, or take advantage of airline miles - it just means that the secret to their success was to simply get way from the burden of debt completely. Remember, the largest tool to building wealth that you have is simply your income. When you no longer have to write those checks to everyone each month, you have many more options to save money, give money and invest money.

~

For me it comes down to releasing the idea that we have to have debt to succeed in being financially secure. Which, for our family, means no credit cards since the emergency fund and 3-6 months living expenses fund should cover all impromptu changes. Of course, the reality is that we are still chugging away at Baby Step 1 since we decided to move. :) And we have cut all credit cards up except one which we have here at home and will be cutting up once Baby Step 1 is completed. By the way, we didn’t have that card with us on our trip to PA. If that answers any questions. ;)

~

We also were talking in the earlier comments about what Dave’s suggestions are if you need to buy a car or a house and you don’t have good credit.

I think it is clear whenever you read any of Dave’s books or listen to his radio show that he feels that used cars are your best bet while working on debt elimination. Another words, no loans for new cars! Or loans for used cars, for that matter. Saving up and paying cash for a used Honda to scoot around town is a good idea.

And as far as a mortgage, I’ve heard Dave often talk about mortgages that are reasonable. Once again, he doesn’t think that debt for a house is the worst thing ever. He says that the best mortgage is the 100% down plan. :) And if you can DO that, well, more power to you! I think that’s amazing.

For the rest of us, he advises not to buy a house until we are ready. And by ready, that means out of debt with a fully-funded emergency fund. If you’ve saved that much money and have spent time working on your finances, I can only imagine that your credit is in much better shape. And if it’s impossible, then I’d save until you could choose the 100% down plan. :-P

There is nothing wrong with renting for a little while. This demonstrates patience and wisdom.

- Dave Ramsey

Perhaps this will be the first time in my life in which I can say I’m choosing to demonstrate patience and wisdom. Of course, I will say that humbly. ;)

Two Notes:

1. I haven’t given a ton of information word-for-word from the FPU course because you should read the books or join the course to get Dave’s complete thoughts.

2. For those really interested in Dave Ramsey’s financial teachings (and he really does mostly talk about finance and not spiritual truths - he is not a preacher), read these articles, listen to his radio show, go visit a FPU class (the first class is FREE), etc.

Tags: finances, financial peace university, video

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