The legendary investor isn’t usually a fan of credit cards, and here’s why.
- Billionaire investor Warren Buffett has expressed his negative feelings about credit cards.
- However, most of his reasoning is about interest rates and the potential for impulse spending.
- If used correctly, credit cards can be a great financial tool.
Millions of Americans use credit cards to pay for purchases, with the average cardholder owing nearly $5,800 in the first quarter of 2022 and nearly $900 billion in total credit card debt in the United States. But despite their popularity, credit cards can be dangerous if misused.
Billionaire investor Warren Buffett has repeatedly expressed his contempt for credit cards, even saying he pays for 98% of his own purchases in cash. Here’s what Buffett said about credit cards and why he feels that way.
Warren Buffett isn’t the biggest fan of credit cards
At Berkshire Hathaway’s 2020 shareholder meeting, Buffett said a friend who had recently made money asked him for advice. And instead of advising her on an investment idea, Buffett advised her to use it to completely pay off her credit card debt, which had an average interest rate of around 18%.
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His reasoning? “It’s going to be way better than any investment idea I have.”
Think of it this way: the stock market as a whole has historically produced annualized returns of 9% to 10%, depending on the exact time frame of several decades. Even the best investors consistently produce returns in the 12% to 15% range. So, even if your investments are doing very well, by owing money at 18% (or more), you are exposing yourself to losing in the long term.
Also, many people use credit cards rather impulsively. In fact, a 2018 survey found that around a quarter of people in credit card debt spent more than they could afford on unnecessary purchases. As Buffett says, “If you buy things you don’t need, soon you’ll have to sell things you need.”
He scores a point
To be fair, Buffett makes some great points. After all, Americans racked up $1.14 trillion in revolving debt in July 2022, most of it in the form of credit card debt, and the average credit card interest rate is over 18%. It is not uncommon to see interest rates in the upper twenties. But based on the average, that means we’re collectively spending over $200 billion on interest every year on revolving credit debt.
A right way and a wrong way
While Buffett certainly made some great points about credit cards, there’s a right way and a wrong way to use credit cards. And if you have the knowledge and discipline to use them correctly, and only buy things you would buy anyway, credit cards can be great financial tools. Consider the following:
- Some of the best credit cards offer rewards, including up to 2% cash back on purchases. If you pay off your balance in full every month and therefore pay no interest, it’s free money. It’s actually a very Buffett-like strategy of getting free money for things you were going to buy anyway.
- Credit cards with a 0% introductory APR or that offer a 0% APR on balance transfers can actually be a great way to fund purchases without a ton of interest.
- By using a credit card and paying the bill on time each month, you can significantly improve your credit score over time, especially if you have little or no balance.
Ultimately, like many other financial tools, credit cards can be used productively or destructively for your financial life. Buffett’s advice is certainly good, but it ignores the benefits of credit cards.
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