Mark Cuban is one of the most famous billionaires in the world, so he may know a thing or two about financial responsibility. But one unconventional piece of financial advice that he gives people is to avoid credit cards like the plague. But why?
Simply put, “If you use credit cards, you don’t want to be rich,” he told personal finance radio personality, Dave Ramsey, during an interview for his show “The Ramsey Show.” The reason for this controversial opinion is because of the high-interest rates that credit cards typically come with, says Cuban.
He’s not wrong. According to the latest data from the Federal Reserve, the average interest rate for a credit card is around 16.65%. On the higher end, some credit cards may even come with an interest rate as high as 36%!
Credit card interest can be avoided if the balance is paid in full every month. If you fail to do so, the amount owed gets slapped with an interest charge. If/when the same thing happens the next month, the interest continues to compound and before you know it, you may end up owing more in interest charges than what you originally spent. Even if you manage to make the minimum payment every month, sometimes, it may barely make up the interest charges!
Mark Cuban says that it can be difficult for most people to make the full payment of their credit card charges every month. Once again, he is right. According to CNBC, credit card debt hit an all-time high in the US recently, climbing up to a whopping $930 billion, with younger Americans taking on the brunt of that amount!
Even if you pay off your credit card debt completely, says Cuban, you would have spent at least 15-20% on interest. He says that is money wasted, money that could have been spent or invested on something more productive.
Cuban’s Suggested Alternatives to Credit Cards
For day-to-day purchases, Cuban suggests using a different kind of card. “Credit cards are not your friend,” he tells CNBC Make It, adding further, “Debit cards are ok if there are no fees.” Since debit cards utilize the funds that are already in your account, there’s less risk of overspending. Most banks do provide overdraft facilities but they are typically much lower than the spending limit on a credit card.
For larger purchases, the billionaire says it’s better to take out a personal loan instead of using a credit card. A personal loan can be paid back in installments in regular increments over a set period of time. Plus, they usually have lower interest rates than credit cards. According to recent data from the Federal Reserve, the average annual percentage rate (APR) on a 24-month personal loan is around 8.73%.
However, as per the lending tree, personal loans can also come with a hefty interest rate, sometimes as high as 36%. But this often depends on the borrower’s credit score, so Cuban says those with good credit will be much better off with a personal loan.
Plus, he says, a loan can also help them build on their credit score, much like a credit card. Like credit cards, missing a payment can negatively affect your credit score. But with a longer time period for repayment and a lower interest rate, loan payments should be much easier to meet than credit card payments. The cherry on top is that there is also no temptation to spend more money as a personal loan is a one-time payment made to you and you cannot spend more than what you receive initially,
The Other Side of the Argument
As we mentioned in the beginning, this opinion of Mark Cuban is quite controversial. Most financial experts agree that credit cards can be a great tool for building credit. In fact, some of them even suggest getting your child a credit card (supplemented by you, of course) as soon as your bank allows.
No, they’re not suggesting you let toddlers run around on spending sprees. Instead, you can cut up the card or put it away somewhere safe. What this does is establish a good history so that when they are old enough to qualify for their own credit card or loans, they’ll be able to get a better deal.
Credit cards also come with other perks such as reward points, card offers, and cashback. It is also much safer to use a credit card when shopping online.
Senior industry analyst at Bankrate.com, Ted Rossman, says that while he agrees that Cuban’s advice on using personal loans instead of credit cards would be best suited for one-time expenses such as an unavoidable home repair, it wouldn’t make sense to use personal loans for daily expenses – or even larger discretionary expenses. Rossman says that using personal loans “feels like a systemic issue with no end in sight.”
“I think it would be very dangerous to use a personal loan to finance a vacation or a boat or some other discretionary expense,” he adds.
But, Rossman, like all financial experts, agrees that you shouldn’t be spending beyond your means – credit card or not. “If your expenses are routinely outpacing your income, something has to give,” he says. “You need to either find a way to earn more or spend less.”