May 28, 2018
Probably one of the most controversial steps in the Dave Ramsey way to financial peace is to get rid of any and all credit cards. People have a lot of conflicting thoughts about this rule, but the reasoning behind it is pretty simple: credit card debt is a gigantic problem in America. The Federal Reserve has found that Americans are approaching $1 trillion in credit card debt. Rewards, points, airline miles, FICO scores aside, the average spender is not disciplined in regulating their credit card spending which eventually leads to a giant credit card bill to pay off. And when your debt outweighs any of the "benefits" of having a credit card, are the "benefits" even worth it anymore?
I've now been through three different Financial Peace University classes. Both in the one that I attended at the beginning of my own financial freedom journey, and the two that I've had the opportunity to coordinate, the lesson on credit cards has always been one of the hardest for participants. Because Dave Ramsey is so anti-credit card, there is time set aside in the lesson to physically cut up your cards. Every time we get to this part in the class where everyone is encouraged to take out their credit cards and start chopping, people freeze. They look around with terror in their eyes and anxiety on their faces. The hesitancy is often palpable in the room as everyone processes what they're being asked to do.
The truth is, for many of us, credit cards feel a lot like security blankets. The thought of getting rid of them all, and not even having one "just in case" really wigs us out. Every time we get to the credit card cutting phase of the class the inevitable question is asked.
"Don't I need to keep one just in case of an emergency?"
And the answer is no.
See, if you're following the baby steps, you're very first one is to build up a $1,000 emergency fund to use...you know...in case of an emergency. Step two is to pay off your debt as fast as humanly possible using the debt snowball method, and then step three is to build that emergency fund into a savings that will cover 3-6 months of expenses. If you follow these steps, no credit cards are necessary. And, though, many people believe that the minute they cut up their credit card, they'll have an emergency that exceeds $1,000, it's likely that we've never actually been in that situation before and it's likely we won't have to be.
If we hold on to a credit card, even just one for emergencies, it is likely that we will not save up for things as diligently as we would if we didn't have a credit card security blanket in our wallet. Temptation easily sneaks in when you've got that plastic in your possession, and then the next thing you know Christmas presents become an "emergency," then the next new Apple product becomes an "emergency," and so on and so forth. Before you know it that credit card bill has climbed high fast.
So, though controversial, I echo that there is no need to keep a credit card in case of an emergency, especially while you're paying off debt. There is just too much temptation that creeps in when it's in your wallet and with its capability of giving us instant gratification it's the easiest gateway drug back into debt. Just say no, guys. ;)
PS - if you need a budget template to start working that debt snowball method, grab my free one below!