Why Ralph Nader doesn't use credit cards

The Motley Fool has an interesting article online today about Ralph Nader's opinion of credit cards. The famous consumer advocate and former presidential candidate, is anti-credit card for several reasons (none having to do with Dave Ramsey). Mr. Nader doesn't use credit cards because he believes they:

• are an invasion of privacy
• increase the price of goods we buy
• support big banks that are unfair to consumers

All three of Nader's points are valid. Credit cards definitely have a downside. You can add the fact that they encourage irresponsible spending and that they are easily used by identity thieves to this list of negatives. But on the other side, there are also many positives of using credit cards:

• Convenience
• Fraud liability protection on purchases
• Allows you to rent a car or book a hotel room
• Helps you deal with financial emergencies
• Good for your credit scores
• Flexible financing for larger purchases
• Potential to earn valuable rewards for spending

I love credit cards, but the way I use them is unique. I make almost all my day to day purchases using credit and pay off the balances in full online nearly every week. This way, I get all the perks of using credit with none of the financing costs or debt issues.

What do you think about credit cards? Do the positives outweigh the negatives? Share your opinion in the comments section below.

Comments

[Emma]

Interesting, I just had a conversation with a co-worker about this very thing. I'd have to say I agree with Nader on this topic, of course, I am a Dave Ramsey listener. We are responsible, financially speaking, that we can probably pay off our balances each month, if we chose to. But, like I told my friend, I like that I can buy something and be done with it.

I don't think the positives you've listed even come close to outweighing the negatives.

1) Convenience. That is one of the main reasons most people in America are broke. Credit cards are convenient AND allow us to indulge in our beloved instant gratification. Gotta have it now!

2) Fraud liability protection on purchases. It's rather difficult to deal with fraud when you pay with cash. Although it can happen, but still, it's rare.

3) Allows you to rent a car or book a hotel room. This can also be done with a debit card that has the same fraud and liability protection as a credit card.

4) Helps you deal with financial emergencies. I hate this excuse. Quite simply, an emergency fund does the same thing. Grandma used to call it the rainy day fund. Why? It rains! If you don't plan for it, VISA's got your back.

5) Good for your credit scores. Well, credit scores are great, if you plan on buying things you can't afford, otherwise known as borrowing.

6) Flexible financing for larger purchases. I like not having to juggle or search for the 'best' rates on purchasing. With cash, you have instant closure. No APR's or keeping tabs with what Bernanke is doing.

7) Potential to earn valuable rewards for spending. I don't really care about earning rewards. Get a small buck for spending a whole lot more. I don't think so. I'd rather stick to investing.

Now, I know that you are religious about your cards and paying off the balances, and that's great. But 78% of America carries a balance on their cards.

I'd like to add that the collecting practices of these places should be reason alone to not do business with these people. We boycott or refuse to do business with retailers for lesser things, yet we turn the other cheak when it comes to credit cards and financial institutions. Why is that?

[Nikita]

Emma,

1) You are conflating convenience with availability of credit. If you took away the convenience of the electronic processing of cards and required people to write checks from their credit card account, I bet 78% of America would still carry a balance.

7) Once again, if you are not changing how much you spend by having a credit card, you definitely win out. We pay our rent by credit card, and we basically get a $10 discount for doing this. It's not like we had the option of investing this cash instead of paying rent. (Though with the credit cards, we can keep money in our savings account longer, earning another $3 on the float.)

I mean, yes, a big downside of credit cards is that they let you spend money irresponsibly. And a big downside of hammers is that they let you bruise your thumb, but they're a lot better once you know how to use them.

[Emma]

Actually, we don't write checks..well, we write two checks a month (daycare). There's nothing more convenient than cash. No processing or check writing time. :)

And, it's not so much about learning how to use them, it's about learning how to live without them. Life is easier, sure, with credit cards. But what makes life enjoyable is doing the hard things. You can enjoy a vacation better, when it doesn't follow you home. :)

[David]

*** 3) Allows you to rent a car or book a hotel room. This can also be done with a debit card that has the same fraud and liability protection as a credit card.

Debit cards DO NOT have the same fraud and liability protection as a credit card (they have far less protection). Generally, you are protected from credit card fraud for any amount once you notify the card issuer, and for anything over $50 if you fail to notify the card issuer in a timely manner. With debit cards, you are liable per incident for the first $50 if you fail to notify the bank within two days, $600 if you fail to notify the bank within 60 days, and for the whole amount if you fail to notify the bank longer than 60 days. In addition, if the money is withdrawn via your pin number, you can be liable for the whole amount immediately, even if you let the bank know right away (this is up to the bank's discretion). And in the meantime, you are liable for all bounced check fees you incur while the missing balance is not in your bank account (again, up to the bank's discretion).

*** 5) Good for your credit scores. Well, credit scores are great, if you plan on buying things you can't afford, otherwise known as borrowing.

Practically speaking, few of us can afford to pay cash for the most expensive items immediately in life (example $50,000 house, $10,000 car). Responsible borrowing has it's place in our society (unless you feel that we should all be renters and not owners). The existing credit score system, while a very poor and inaccurate way to judge someone's willingness to repay, is the system we use. Since credit scores include a component that is based on recent repayment history, a single credit card properly managed will decrease your cost of borrowing. This means that a properly managed credit card saves you more money in reduced loan interest rates and insurance costs than it adds to the cost of consumer purchases.

The real problem here is the lack of privacy protection in favor of commercial interests coupled with no real business costs for security breaches.

[EmilyPeters]

Great comments everyone! This is obviously a heated issue. I have to agree with David that credit and loans are sometimes necessary. Especially here in San Francisco where a small home costs more than $700,000.

[Emma]

Agreed...these are valid arguments David. Although I know that the particular debit card we have does have the SAME fraud and liability protection as, say, Visa card. And, not all rental car places are the same. The great thing about not using credit cards, is that you're a bit more discretionary about places you do business with. It's all about being an aware consumer.

Where is this $50,000 house? :) I do have to say though, that it's much easier to save money when you're not making payments right and left. I think renting is a temporary thing. Until you have enough to a buy a house that is. :)

[Martin]

I have a recurring argument with a friend over debt. He says that some debt, like a mortgage or a car loan, is good, because it builds your credit history and allows you to make money back on your investment. I feel that there's no such thing as genuinely GOOD debt...just necessary debt, and credit cards are a perfect example of that.

The convenience they offer is filled with so many hidden traps and chains that I think most people who have used them for anything but the bare minimum--and not paid them off in full--end up wishing they'd never had them.

[EmilyPeters]

I consider the debt issue to be very similar to the alcohol issue. One glass of wine a day is good for you...being an alcoholic is very bad for you.

It's the same with debt. Using debt responsibly has many benefits...being a debt-aholic has many downsides.

If you know that you are a debt-aholic, you would be wise to stay away from credit. But most people have the ability to use credit responsibly.

[Tee]

An "anonymous" came to my blog and commented asking my opinion on this issue since I posted about having read the Dave Ramsey books "Financial Peace University"... I think this is a personal decision and it's not a one size fits all... I think the majority of Americans though have showed a lack of self control when it comes to credit. People like them (myself and my husband), should try very hard to live without credit, or else learn to use it responsibly. There are definite pros and cons. I am not anti credit, but definitly anti credit card companies. You don't have to be a genius to see the games they play.
Just yesterday I called one. We always pay on time but I told them, this month we are going to have to pay 1 day late and there's nothing we can do about it. I asked, "Now is that a problem?" ... They informed they would charge me a late fee... After 15 minutes of being persistent they said "as a courtesy" I would not be charged this time. How hard was that to say the first time? They squeeze every penny they can out of people. They show up on college campuses and seduce young adults who don't have the maturity to handle credit. They give low income families more credit than they can handle and high interest rates.
I think the games they play with people's lives are wrong. Too many people have commited suicide over debt. Too many families have been destroyed. I want to live debt free - if not for the mental and financial health of my family - but to boycott companies that take advantage of people and destroy lives through their unethical practices.

[Emma]

I understand where people are coming from, truly. This is one of those issues where the majority of people are adamant about their stance. Credit cards, love them or hate them, they're a way of life. Well, at least here in America.

Oddly enough, they haven't been around that long. James Cash Penny and Henry Ford refused to offer credit purchases because they felt that people shouldn't buy things they couldn't afford. It wasn't until Penny died that J.C. Penny's introduced it's credit card. And, reluctantly, with influence from family and board of directors, Ford introduced it's credit division. They are the biggest money-makers for these, and many other, companies.

I'm still trying to figure out what it means to be responsible about credit. I can't honestly say, my opinion of course, that I don't believe that fiscal responsibility includes credit cards. If I am responsible with my finances, then why do I need to borrow money? Credit cards don't represent responsibility. In fact, most people see them as a necessary evil. I for one don't think they're necessary. People can make all the excuses they want for having one or many. But then again, we can justify just aboout anything in our heads. Personally, we've lived without credit cards for just over a year and can honestly say that it's been one of the most stressless, financially speaking, years in our marriage. We've traveled by plane, rented cars, booked hotel rooms, all with our debit card. It can be done.

To each his own I suppose. James Cash Penny once said, "to buy on credit is folly." Old school thinking for sure, but can we truly write it off?

[Ken]

I cant imagine living in San Fransisco, and I dang sure cant imagine paying 700 large for a house there.