Burn Your Credit Cards, Says Out-of-Touch Billionaire
Billionaire tech entrepreneur Mark Cuban recently did an interview with financial advice writer Dave Ramsey in which the two agreed: Get rid of your credit cards. "If you use your credit cards, you do not want to be rich," said Cuban. "That's my favorite line, I tell it to people all the time." Example coverage: CNBC article 4 Nov 2022, Motley Fool article 6 Nov 2022.
Despite Cuban's confidence in telling people this all the time, it's actually poor advice. Oh, I imagine it probably works for him- as a billionaire. But does he even make decisions about whether to pay with plastic or hand over cash for normal, everyday purchases? I expect someone at his level of wealth (and even those with merely hundreds of millions of dollars net worth) has staff who manage how things like for groceries and clothes, probably even cars, are paid for. I doubt Cuban gets involved with payments of anything less than $200,000. It's literally not worth his time.
So how should a not-billionaire handle credit cards? Especially if, as Cuban taunts, you want to be rich? Here's my advice, in the form of Five Things:
1) If you're not carrying a balance, you're good. The big financial danger with credit cards is carrying a balance. Interest rates on cards can be fierce, 18% a year, 21%, or higher. People who overspend their budget, leaving balances on their cards at the end of each month, find that interest on those balance adds up so quickly it's hard ever to pay them off.
2) Use your card as a bill consolidator. I haven't paid interest to a credit card in over 25 years. But even though I pay for all of my regular expenses out of my monthly budget I still use credit cards for almost everything. To me they're bill consolidators. I tap my credit card at the register because it's easier than keeping cash on hand and safer than using a debit card. Each month there's just one or two cards I pay from my checking account.
3) Borrow on a card... if you have to. There were times in the past when I needed to pay for things on a credit card I couldn't afford. When I was in college and graduate school I had uneven income across the year. During the school year I worked part-time while taking classes full time, and my income wasn't quite enough to cover even my ordinary weekly expenses, let alone anything unexpected like car repairs. I accumulate balances on my cards during the 9 months of the school year and paid them off with money I earned working 40 hours/week over the summer. Was it an ideal situation? No, but it was the best alternative available.
4) "Get a personal loan"? Yeah, once you're already rich! Cuban recommends that instead of using a credit card to pay for expenses you can't afford right now, you take out a low-cost personal loan instead. That's the most ridiculous part of his advice. That type of loan only exists for people who are already rich! For folks living paycheck-to-paycheck what you get are payday lenders- and if you think credit card interest rates and terms are bad, hoo boy, hold onto your wallet!
5) Credit cards establish your credit history- which you need. The biggest positive reason for using credit cards is that you need them because they help build your credit record. Even if you don't carry balances on your cards, just having them, using them, and paying them off each month establishes a favorable history of managing credit. Your credit history is taken into account when you apply for a loan. That might be a car loan, a house loan, or even one of those low-cost personal loans billionaire Mark Cuban thinks everyone has access to. Now, if you're already rich like Mark Cuban, the bank looks at your 9-figure or 10-figure net worth and gladly lends you money at their best rate. For everyone else, the bank looks at your credit history to determine not only whether or not to lend you money but also at interest rate. The better your credit history, the lower the rate you get. So you really want to establish a record starting with credit cards; it'll save you money later on when you're ready to take big steps forward with your finances.
Despite Cuban's confidence in telling people this all the time, it's actually poor advice. Oh, I imagine it probably works for him- as a billionaire. But does he even make decisions about whether to pay with plastic or hand over cash for normal, everyday purchases? I expect someone at his level of wealth (and even those with merely hundreds of millions of dollars net worth) has staff who manage how things like for groceries and clothes, probably even cars, are paid for. I doubt Cuban gets involved with payments of anything less than $200,000. It's literally not worth his time.
So how should a not-billionaire handle credit cards? Especially if, as Cuban taunts, you want to be rich? Here's my advice, in the form of Five Things:
1) If you're not carrying a balance, you're good. The big financial danger with credit cards is carrying a balance. Interest rates on cards can be fierce, 18% a year, 21%, or higher. People who overspend their budget, leaving balances on their cards at the end of each month, find that interest on those balance adds up so quickly it's hard ever to pay them off.
2) Use your card as a bill consolidator. I haven't paid interest to a credit card in over 25 years. But even though I pay for all of my regular expenses out of my monthly budget I still use credit cards for almost everything. To me they're bill consolidators. I tap my credit card at the register because it's easier than keeping cash on hand and safer than using a debit card. Each month there's just one or two cards I pay from my checking account.
3) Borrow on a card... if you have to. There were times in the past when I needed to pay for things on a credit card I couldn't afford. When I was in college and graduate school I had uneven income across the year. During the school year I worked part-time while taking classes full time, and my income wasn't quite enough to cover even my ordinary weekly expenses, let alone anything unexpected like car repairs. I accumulate balances on my cards during the 9 months of the school year and paid them off with money I earned working 40 hours/week over the summer. Was it an ideal situation? No, but it was the best alternative available.
4) "Get a personal loan"? Yeah, once you're already rich! Cuban recommends that instead of using a credit card to pay for expenses you can't afford right now, you take out a low-cost personal loan instead. That's the most ridiculous part of his advice. That type of loan only exists for people who are already rich! For folks living paycheck-to-paycheck what you get are payday lenders- and if you think credit card interest rates and terms are bad, hoo boy, hold onto your wallet!
5) Credit cards establish your credit history- which you need. The biggest positive reason for using credit cards is that you need them because they help build your credit record. Even if you don't carry balances on your cards, just having them, using them, and paying them off each month establishes a favorable history of managing credit. Your credit history is taken into account when you apply for a loan. That might be a car loan, a house loan, or even one of those low-cost personal loans billionaire Mark Cuban thinks everyone has access to. Now, if you're already rich like Mark Cuban, the bank looks at your 9-figure or 10-figure net worth and gladly lends you money at their best rate. For everyone else, the bank looks at your credit history to determine not only whether or not to lend you money but also at interest rate. The better your credit history, the lower the rate you get. So you really want to establish a record starting with credit cards; it'll save you money later on when you're ready to take big steps forward with your finances.