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Millions of Americans use credit cards to pay for purchases, with an average cardholder owing nearly $5,800 as of 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 used improperly.
Billionaire investor Warren Buffett has expressed his disdain for credit cards several times, even saying that he pays for 98% of his own purchases with cash. Here’s what Buffett has said about credit cards, and why he feels the way he does.
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Warren Buffett isn’t the biggest fan of credit cards
At Berkshire Hathaway’s 2020 shareholder meeting, Buffett said that a friend who recently came into money asked for his advice. And instead of advising her about an investment idea, Buffett advised her to use it to completely pay off her credit card debt, which had an average interest rate of about 18%.
His rationale? “It’s going to be way better than any investment idea I’ve got.”
Think of it this way: The stock market as a whole has historically produced annualized returns of 9% to 10%, depending on the exact multi-decade time period. Even the best investors consistently produce returns in the 12% to 15% range. So, even if your investments do very well, by owing money at 18% (or more), you’re setting yourself up to lose in the long run.
In addition, many people use credit cards rather impulsively. In fact, a 2018 survey found that about one-fourth of people with credit card debt spent more than they could afford on unnecessary purchases. As Buffett says, “If you buy things you do not need, soon you will have to sell things you need.”
He’s got a point
To be fair, Buffett makes some excellent points. After all, Americans have accumulated $1.14 trillion in revolving debt as of July 2022, with most of that coming in the form of credit card debt, and the average credit card interest rate is over 18%. It’s not uncommon to see interest rates in the upper 20s. But based on the average, this means that we’re collectively spending more than $200 billion in interest every year on revolving credit debt.
A right way and a wrong way
While Buffett certainly has 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 regardless, credit cards can be excellent financial tools. Consider the following:
- Some of the best credit cards pay rewards, including as much as 2% cash back on purchases. If you pay your balance in full each month, and therefore don’t pay interest, this is free money. This is actually a very Buffett-like strategy, getting free money for things you were going to buy anyway.
- Credit cards with a 0% intro APR or that offer 0% APR on balance transfers can actually be a great way to finance purchases without a ton of interest.
- By using a credit card and paying the bill on time every month, you can dramatically improve your credit score over time, especially if you carry little or no balance.
The bottom line is that like many other financial tools, credit cards can be used in a productive or destructive way for your financial life. Buffett’s advice is certainly good, but it doesn’t consider the benefits of credit cards.
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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Matthew Frankel, CFP® has positions in Berkshire Hathaway (B shares). The Motley Fool has positions in and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
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