My Financial Recovery

Would You Rather Pay Down And Use A Credit Card Or Pay With Cash?

Posted on: April 20, 2009 by Matt 5 Comments

Originally uploaded by lemonjenny

While driving with my girlfriend yesterday we had a conversation about my credit card that still carries a balance. We started talking about my car loan from an ex-girlfriend and how excited I am to have it paid off in August and I noted that I should be able to pay the balance of the credit card off by the end of October.  She asked how much the balance on the credit card is and I told her that I still owe about $1,900 on the card.

She thought for a minute then asked the questions: “Why is it going to take so long?  Why haven’t you paid it off already?”

I responded that I just can not afford to pay off the debt and still be able to carry other expenses that we incur.  She then argued that I make enough that I should be able to pay off the card in a couple of months at the most and that all the expenses that I claim I need cash for could just as easily be paid for with the credit card. I started to feel a little squeamish.  I just do not relish the thought of emptying my bank account and using a credit card for living – especially when I am trying to just pay the balance off.

After further discussion she logically laid out the following thoughts:

• I am paying a high interest rate on the card: Certainly higher than the interest I am getting returned from my bank account.  Paying the card down to a lower balance certainly makes sense here.
• I will still have the money available, just in a different place: My argument of not being able to pay for gas, groceries and other expenses makes no sense.  I normally use a debit card for all these purchases – if I pay down the credit card balance I can just as easily use my credit card.
• I will probably spend less on the credit card: I argued that I was trying to avoid spending on the credit card because I would probably spend more, not less.  Her response: If I am working on paying the balance off and not wanting to increase the amount owed – I will probably think a little harder about impulse purchases. I had not considered that using a credit card would encourage me to spend less before.  Her argument is good and plays to my thought patterns pretty well.  If I am holding a card that I am hesitant to charge I am really gonna think about how much I really need what I am buying.
• I am just neurotic about money: I knew this already.  I freak out when my checking account drops below having a couple hundred dollars in it.  There is not a set amount but it triggers me into a bit of a panic mode.  I like the security of having money available.

At the end of our conversation I agreed to give her method a shot and see what happens.  It should be interesting and I will be sure to keep everyone updated on how it goes.  I am hesitant as it seems that most personal finance literature I read expounds the evils of credit cards but she made a good argument (you guys just got the synopsis).

What would you do?  Would you prefer to pay down the debt and use the card for expenses or keep using cash and try to pay the debt down slower?  I suppose the real question is cash or credit?