I truly appreciate Dave Ramsey and his Financial Peace University. I highly recommend it for everyone. Indeed, it should be required curriculum in high schools.
However, there is at least one disagreement that I have with his conclusions. That disagreement is over whether or not to use credit cards. Dave suggests to never use them. I believe that for people who are not financially disciplined, then I agree that they should not be used. However, Samantha and I have used the Bank of America Travel Credit Card since January of 2015. We keep our budget and never spend more than what we know we have in cash in the bank. We have never paid late, never paid any interest, and never paid any fees. We have in a year and a half of building up rewards earned $1,100 cash.
So by using the wise budgeting principles of Dave Ramsey and then adding some sagacious decisions of our own, we have earned $1,100 in about 19 months. That is a little over $57/month. We budget $30/month for electricity and $10/month for clothing. That means by using the Bank of America card wisely, we cover all our electric and clothing expenses over the whole year and still have some money left over to throw at another expense.
While this is exciting to me, I have to admit that I feel a little saddened by this because I know that one big reason banks and other credit institutions can give rewards is because there are people out there who spend more than they earn and so rack up late fees and interest which is a huge source of income for the loaning institutions. Because these institutions know that people will jump at the chance to buy something that they know they cannot pay for and that people are suckers for things like “rewards”, these institutions have no problem hanging out carrots for people to grasp at while they really just spend their time trudging through debt.
A big reason why Bank of America can afford to give me over $1,000/yr of free money is because there are a lot more people out there who give Bank of America more money than they loaned through credit due to interest and late fees. While these same people may also be receiving some rewards back, they end up paying way more to the credit institution due to interest on the unpaid amount on their card at the end of each billing cycle.
(I understand that credit institutions make more money through interchange fees charged to merchants for accepting the transaction. However, if all people paid their complete bill at the end of each cycle, we certainly would not see nearly as many rewards.)
Now, I really like Bank of America. I have never had a single unresolved problem with them and every time I have had a fraudulent charge or had any kind of complaint they have very quickly solved the problem. To be sure, there are several things that I disagree with concerning the banking industry in general, but as a bank, Bank of America is top-notch in my mind.
So I do not want you to get the idea that I hate Bank of America because I am pointing out one way how they make money. What I do want you to see is that credit institutions are able to make the amount of money that they make due in large part to people’s greed. That is right, one of the main reasons I am able to reap the benefits of my card is because other people out there are greedy enough to desire something they really cannot afford. Instead of saving for a few months or years, they have to have it now.
As I learned from this extremely helpful website, there are two kinds of credit card owners: “transactors” who make charges on their cards but pay off their full balance at the end of each cycle; and “revolvers” who do not pay off the full balance of their card and have to pay interest. As the website I mentioned points out, revolvers are not only lower income households; in fact, if you are in a higher income bracket, you are actually more likely to be a revolver. Crazy, right? This is a perfect proof of my claim that it is greed allowing me to reap the rewards offered by credit institutions. If it were not greed, then those who made more money should be able to make full payments on their cards. But instead higher income people have higher tastes and since they make a lot of money they are willing to pay the interest if it means they get the nicer things.
Now, I am not saying that all transactors are not greedy. Just because you can pay off your credit it does not mean that you are not buying things out of greed. No debt does not automatically mean no greed.
Greed, or its sibling, entitlement, is deeply entrenched in our society. So much so that we usually do not even know that we are a victim of them. We will defend our poor spending habits every way we can. But let us say that it is not poor spending habits. Let us say people in America have credit card debt out of necessity. This argument is legitimate for a very small amount of people. However it just is not the case for the vast majority of us.
What we call “necessity” only highlights how greedy or entitled we are. We think we need our own apartment (or house), our own car, our own pet … and the list goes on. If you think we do need all these things, I would like to introduce you to a few friends of mine. These friends of mine are in America on a work visa. Five of them share a one bedroom apartment and split two cars. They will live like this for several years before they go back to Brazil. They live very happy lives and still spend money on luxuries like fees it costs to play indoor soccer. But they do not need the things we need. Truth be told, we do not need the things we “need”. I understand that they will only live like that for a relatively small amount of time, but I am sure we could reduce our standards greatly if we only realized how greedy and entitled we are. Indeed, if we were willing to reduce our standards even for a few years, we may be able to finally afford the higher standard that we think we need right now. Our level of greed and/or entitlement starts off remarkably high compared to the rest of the world. So when we think we are not being greedy, compared to the rest of the world, we are still really greedy. We are so greedy we do not even know that we are greedy.
Do not think you suffer from greed or entitlement? I challenge you to do this then: do not make a single purchase for three months that is not of absolute necessity (that means no Doritos, Oreos, fast food, Dunkin Donuts coffee, video games, etc.); if you are able to pay all your bills and still have money left over, donate at least half of that money to a (researched) charity for the poor (or to people who you know are struggling) and immediately put the rest in savings. Try that for three months and let your eyes be opened to just how much greed we have lying in us. Hopefully this challenge will help us melt away some of our greed.