Interest Rates Don’t Matter If You Don’t Carry a Balance: Some Thought on the Cash-Only Debate

Earlier today, I read with interest the comments on this Get Rich Slowly article about Suze Orman and the “cash only” movement. In a nutshell, the article advocated (as Suze apparently does now) that people should abandon credit cards because the credit card issuers have been raising interest rates.

To put it simply, the raising of credit card rates shouldn’t matter to a person who has control over their financial life. If you don’t carry a balance on your credit cards for longer than the grace period, it doesn’t matter what the interest rates are.

Based on the comments I read there, a lot of people do the same exact thing I do. I use credit cards for their convenience and the rewards they provide. I pay off the balance in full each month (I pay all such bills on the 1st and 15th of each month, actually, to keep it simple).

There’s one big problem with this plan, some will point out. It puts you at risk. What happens if you can’t pay the balance at the end of the month?

For starters, I never, ever carry a balance that’s more than what I have in cash in my emergency fund. I never even come remotely close. In fact, I never come remotely close to carrying a balance that’s more than what’s in my checking account. If I’m turning to my emergency fund, it’s a genuine emergency, not just a great sale at the store.

Which brings me to the second point – effective credit card use requires a lot of self-control. I am speaking from experience here – I learned the hard way about what damage a credit card can do if you don’t have self-control. It took a mountain of debt and a point that was perilously close to personal bankruptcy (while having a baby at home, no less) to force me to wake up to the truth – that a credit card without self-control is like a chainsaw in the hands of a toddler.

If you aren’t spending less than you earn month in and month out, you should go cash only, because cash provides the hard limits that are needed when you don’t have your spending under control. Credit cards are only beneficial to people who spend less than they earn every month, like clockwork. If you can’t or aren’t doing that, the drawbacks far outweigh the benefits for credit card use.

When the credit card companies raise interest rates, it’s not the financially stable people who are punished – they are often barely aware of rate changes because they’re unaffected by the changes. Instead, it’s the people who don’t have self-control – the people who carry a balance – who are punished by the changes.

Yet again, it’s a fantastic argument for living frugally, responsibly, and below your means – if you do so, the games companies play with credit card rates don’t affect you.

If you’re carrying a balance right now and your credit card company has just adujsted your rates, I have a simple plan for you: cut up your credit card. It’s doing you much more harm than good right now. Then, focus intensely on paying off the debt. Absorb as many frugality ideas as you can and try them in your own life. Knock down your life’s routines and build new ones – your old routines are the ones that brought you to this point. Seek out friends who don’t find their self-worth in the things they have. Seek out activities that don’t drain your wallet.

And gradually, you’ll find that credit cards don’t have to be dangerous – they can merely be useful tools – and that you don’t have to worry about rate changes.

Good luck.

Trent Hamm
Trent Hamm
Founder of The Simple Dollar

Trent Hamm founded The Simple Dollar in 2006 after developing innovative financial strategies to get out of debt. Since then, he’s written three books (published by Simon & Schuster and Financial Times Press), contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.

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