According to Dave Ramsey, nationally syndicated radio talk show host and author of The Total Money Makeover, you’ll spend a lot more when you use credit cards because it’s not the same as handing over cash.
A study of credit card use at McDonald’s found that people spent 47% more when using credit instead of cash. “This is money you could have saved,” points out Ramsey, “and even if you pay your bills on time, you won’t beat the system!”
In fact, most families don't pay their credit card bills in full at the end of the billing cycle. On average, card holders carry $8,000 in credit card debt, according to the American Bankers' Association.
Here are five signs that can indicate you’re approaching the danger zone with credit card debt:
- You don’t understand your total debt—If you open statements and focus on the minimum payment due, you could be in “debt denial.” Paying only the minimum payments will keep you in debt longer, and eat away even more of your income, Ramsey says.
- Credit is used for impulse buys—Using credit cards for impulse spending can stack up debt quickly. Using cash for these purchases helps you control spending. You’re actually handing over a limited resource that will run out.
- You hide credit spending from your spouse—This can lead to problems for your credit and relationship. Depending on your situation, you may need help from a consumer credit counseling agency to help you work together to establish an affordable cash-based budget.
- You only make the minimum payments—Your statements include information about how long it will take (and the cost) of trying to pay your balance by making minimum monthly payments. Pay attention to those numbers and try to pay off your entire debt, one card at a time, starting with your lowest balance for quick wins. Pay as much as you can on the smallest debt until it’s gone, while making minimum payments on the others. Then, when the smallest debt is paid off, take the amount you were paying on it, plus whatever else you can save, and apply it to the next one, advises Ramsey.
- You have little or no savings—If your credit card debt makes it difficult to set aside savings, it’s time to get debt help.
The Beauty of Cash
If you have to use plastic, Ramsey suggests using a debit card. “I use them for travel and the occasional convenience of ordering something over the Internet or phone. Other than that, I use cash,” he says.