You Cannot Use Credit Cards Responsibly
When it comes to credit cards, there are three types of people. There are the diggers who are just putting themselves in a hole and don’t realize what they are doing. There are those who are full of it, and make statements such as “I pay off my balance at the end of the month!” Finally, there are those who know what’s going on and stay away from the credit card game all together. I’m sure some of you who love your credit cards are going to get mad and say that I’m crazy, but that’s fine. You have a right to do stupid things with your money.Let’s take a look at the first type of people, the diggers. They see credit cards as “free money.” They do not understand how badly compound interest is working against them, and how long it will be to pay off the balance by writing checks for only the minimum payment each month. They carelessly use their credit cards for every day purchases. Pretty much everyone can agree that these people are mishandling credit cards.
The second group of folks is where it becomes a bit more controversial. These are the people that think they are using their credit card responsibly. They pay off the balance at the end of the month and redeem their rewards points thinking that they are getting free money! These people do not understand that there is always the possibility of your payment somehow not getting to the bank (and it does happen), and you being charged a $39 late fee, and huge sums of interest.
There have also been a number of studies showing that your average purchase is anywhere from 10% to 50% higher when you are using a credit card as compared to cash. This is because it hurts to spend cash, whereas with credit cards that emotional pain of spending money does not exist. You will spend more money if you carry around a credit card as opposed to cash if you realize it or not.
Even knowing these statistics, some people will think that they can beat the system, and will take their 1% cash back or rewards points. These people add layers of un-necessary sophistication to their life, when cash would substitute just as well for a few dollars a month. Most rewards points are never redeemed because credit card companies make it so hard to redeem them. More often than not, it’s not worth your trouble.
The next time someone tells you that they are using their credit card responsibly, they are lying. They have accepted debt as a way of life, and because of that, they will always be in bondage to a bank, a financing company, or a mortgage company. Use your credit card responsibly by putting it in the blender.
It's easy to get trapped by a Credit Card with high interest rates and annual fees. That's why it's a good idea to compare Credit Card Offers in order to determine the Best Credit Card for you. But never sign up for a Credit Card without knowing the details.
Labels: credit cards
posted by Matthew Paulson @ 10:18 AM
15 Comments:
I agree! I recently cut up all my cards and went all-cash. When I canceled my Costco Amex card they were positively flabbergasted. How could I abandon that 1 percent cash rebate? Didn't I know that I could charge my Costco membership fee on there automatically? Uh, yes. Still want to cancel.
I didn't carry balances, but I definitely charged things I couldn't afford, then had to go digging into the savings to pay the bill.
I guess I'll be the first to fuel the controversy fire.
I get 5% off gas, groceries, and drug store purchases with my Chase Card. I've never once thought, "hmm, I'll splurge on that extra gallon of gas because I'm getting 5% off." I've never had any of those thoughts with my spending.
I believe that the numerous studies are skewed due to the first group of "diggers." These people psychologically are spending the "free money" and hence spending more. Is there a comparison of just the second group to cash spenders? That's something that would be interesting for me to see.
I also have not paid a finance charge or late fee in 14 years of credit card usage. In that time, I've gotten thousands in cash back rewards. I'm not sure the second group leave the reward points unclaimed as that's the reason they are using the credit cards. I believe that once again the diggers are the ones not redeeming their points. It also takes me under five minutes calling the number on the back of the card to get my points. 4 of those minutes are when the speakerphone plays music to me. Once through, it's extremely, extremely quick. I believe I could redeem my points on the web even quicker, but I'm not in that much of a rush.
I also carry no debt except to a mortgage company which, at the rate I have locked in is very good debt - often referred to as leverage.
Wow, it's awfully brave of you to call all of the "second type" liars. But I guess you wanted controversy, so here it is.
"These people do not understand that there is always the possibility..."
Yes, there's a possibility, and many people realize it. They also realize they can mitigate this risk many ways (pay early, pay online and keep records, etc.). You're making broad generalizations when you say, "These people do not understand..."
I know people who haven't paid any credit card fees or interest in years, yet they are able to simply cash in their thousands of dollars in rewards. It doesn't have to be complicated.
While *some* people may pay more via credit card than cash, not everyone does. Just because a study says on average it's true, that doesn't mean everyone falls for the credit card companies' psychological scheme. Not everyone is a victim of the emotional difference between spending cash and using credit. Additionally, there are varied results depending on the study, and it some cases that I've seen, the studies are poorly controlled and not statistically accurate.
Let's put this simply, using one example. Every month I have to pay rent. I could either pay via credit card, through an automatic charge, or by writing a check. Either way, I pay the same amount. The difference is that if I pay by credit card, I get a rebate. It's not huge, but there is no good reason for me to get this discount every month. There's no psychological trick, and there's very little chance of my automatic credit card payment missing the due date. How will my rent or other regular expenses paid by credit card, like utility bills, necessary groceries (I buy what I need), etc., suddenly be "10% to 50% higher?" Obviously, that doesn't apply to everyone as you'd like to believe from the studies.
Maybe I'm just lying to myself, but for you to tell me I only *think* I'm using a credit card responsibility without knowing me or my spending habits is mighty assuming.
There's a difference between saying "In *most cases,* the second group of folks aren't benefiting as much as they think they are," and implying that it is impossible to end up ahead no matter how hard you try.
You need some facts to back up the statement: "The next time someone tells you that they are using their credit card responsibly, they are lying." That's unscientific, presumptuous, and incredibly condescending. Because a study describes an average, it suddenly applies to everyone? I'll introduce you to a concept called statistics, if you remind me later.
My life isn't more complicated because I use one rewards credit card for my necessary purchases... the same ones I'd be paying for by cash if I had no credit card. If using one credit card for regular expenses adds unnecessary complication to one's life, that individual is not quite bright enough to handle it.
This is the most poorly thought out post I've read on this blog, or indeed any PF blog ever. I belong to the second group and I don't appreciate being called a liar. You cannot label all credit card users who pay off their blances each month as "stupid lying losers" without making yourself look like an idiot in the process.
I have my credit card balance paid in its entirety by direct debit each month, and this method has never failed. Paying by credit card saves me the bank fee on each transaction. And I have no trouble collecting on the reward system since it's cash back on purchases I would have made anyway. I don't use more electricity just because it's billed through my credit card! My ISP doesn't charge me more for my plan because it's billed to my credit card!
I will unsubscribe from your feed because a) you show poor reasoning skills, and b) you just insulted what I imagine is a significant portion of your readers.
First let me say that I agree with those who have commeted about the second group of card holders. I have had a credit card for almost 7 years now. And 5 of those years I was in college, and never did I have a single late fee, and I always paid the entire balance EVERY month. In fact there where and still are months when I don't use my card at all.
I do not think it is fair to call those of us who are truly responsible with our credit cards liers. Believe it or not there are people in this world that do tell the truth. Plus it is not all about the rewards. With the card that I have I get very little if anything for "rewards". Maybe that means I should switch to a different company, but I have bulit up a good reputation with my current compnay and am happy with what I have. So you can't say that people put more on their cards just because they want the "free money".
Plus it is not like we all carry loads of cash on hand. Why risk carrying cash where if it where stolen would probalby never get back. Where if a card is stolen one can have the account immeditaly stopped and save lots of money and hassle. Plus there are people who when they have cash are MORE likely to spend it then using a card. It is a two way street...and people can over spend no matter what form of payment they are choosing to use.
So I will close with asking where you get off have the authority to give out all of this "advice" about "getting green". Do you have any professioanl expereince to make what you say as creadible inforamtion, or are you just re-stating all the information that you read in books.
So I think that you owe those of us in the second group who you called liers an apology. And like mentioned I think you need to focus on the statistics and not broad generalizations that you assume to be correct. So from now on do your homework.
Hmmm ... this is the dark side to the power of the internet. You can become very popular, or very unpopular, really quickly.
One of my more popular posts on my blog attacked some ideas in a book pretty harshly. But one thing I didn't do was attack people, or at least I tried not to. I think this was the mistake that was made in the post. It's probably evident, but I thought I'd point it out anyway.
The thing is I tend to agree that it's very, very difficult to use credit cards the same way you use cash just because it's so easy to swipe a credit card. So, looking past the personal attacks, I'll be more aware of that point.
Let's see. I have hundreds of thousands of dollars in available unsecured credit on my credit cards, and currently carry a balance of over $60,000 on them. I don't pay a cent in interest and even make a nice sum because of this. Why? Because my banks keep offering me 0% interest deals, which I gladly accept and transfer the money into a high interest savings account. When the 0% offers expire, I withdraw the money and pay off the card, and keep the extra $3k/year that I make from using my credit cards.
Are you going to try and convince me that I'm not using my credit cards responsibly?
This post is dead wrong, and poorly reasoned at that. You can indeed use credit cards responsibly, and you can benefit greatly from using them. Just because you don't consider yourself responsible enough to do so doesn't mean that everyone is that way.
Advantages of CC:
1. Free float: money earns interest in HYS for a longer time. This can be even more so with 0% offers, etc.
2. Rewards: you can get hundreds or thousands of dollars per year back in credit card.
3. Credit score improvement: having cards and using them responsibly helps your score over time. This will save you a lot of money over time if you have mortgages, car loans, or insurance. Having a bad score or no credit history could even get you denied a job or apartment rental.
4. Convenience: can pay one bill per month for almost everything.
5. Protection: credit cards offer better protection than carrying cash or using a debit card.
I am also in that 2nd group of people. I think it's absolutely insane for you to say that we're all liars!! If you believe that everything about a credit card is evil and there is no way to use it responsibly, you are sorely mistaken. Many people in the world are responsible about using credit cards: they only charge as much as they can pay off in a month and they pay attention to due dates so that they don't have to deal with late fees and finance charges. I've got to say, if you prefer carrying cash to credit cards, you have never had your wallet stolen or purchased anything on ebay. I'm sure you never thought of the protection credit cards offer for you.
Also, even those who are less responsible with credit aren't always "diggers." My friend, for example, uses her credit card to pay for books, etc. at college. Why? Because her job doesn't pay enough to finance rent, groceries, and extra bills for school twice a year. Do you recommend that she quit school and stay at a dead-end job for the rest of her life instead of paying off the balance of her credit card over the 4 months of the semester?? I'd say THAT would be financially irresponsible!
This is pure crap.
I have used credit cards for more than 12 years and always paid in full.
One can be a very responsible credit card user, if you don't maximize cash back/miles/points rewards, you are not doing yourself a favor at all.
It is kind of like you refusing FREE money from the credit card companies when you purchase things.
There was a post on MSN communities about which studies I was referring to. Specifically, Kiplinger did a study that shows you spend 18% more if you pay with a credit card compared to cash as an average transaction study.
Dave Ramsey mentions it here: http://www.daveramsey.com/the_truth_about/credit_card_debt_3478.html.cfm
I wasn't able to find the original article.
I would love to see the study referring to people who pay off credit cards in full spend more money than a person using cash.
I am sorry that you feel the need to critisize others so harshly. Were you in CC debt? Is that the cause of the resentment? That others who might be more responsible than you and financially secure can use CC?
I've used CC for 12+ years and had no trouble. My mom told me it was not free cash. I used to track it like a checking account, only buying what I had the cash for. Still do. Idea is use a check register to follow your balance and all charges. Then you'll never go over.
As for late fees, I just pay the bill the day it come in like all bills and I constantly check my balance like a checking account all the time. I reconcile my spending daily pretty much. So where's the possibility for a late fee? If it doesn't get there then I call and tell them what happened.
Also if it's late then my electric, gas, and cable, and all other bills will be late too. And I'd better let my bank know since I use online billpay.
I am sorry that you are so resentful of others. Actually the site you linked does not show the 18% study. In fact the study is not found on the internet. Please post the actual study.
Gee, I guess this post means I am a liar. Please, keep using your cash. You get to subsidize my rebates by paying higher prices so that the merchants can recoup the fees they pay to the credit card companies. Meanwhile, I'll enjoy my rebates and not worry too much about getting hit with a late fee. With nearly 20 years in this game, I haven't paid one yet, but hey, I could be lying about that too. Thank you for helping to cover the cost of my rebates. I use at least $1500 per year and rebates and haven't let one expire yet.
Another second category person here, who hasn't paid any interest or fees since I paid off my last revolving balance around 1998. I pay my credit card bills using my bank's bill payment service, which guarantees on-time delivery of payments or they will cover any incurred costs.
I did have one case recently where Discover didn't apply a cashback reward to the bill appropriately, which resulted in fees, but they admitted their error and reversed the charges. Clearly, there is some risk here (especially with credit card sleaziness like "universal default," where a late payment on one card counts as a late payment on all cards with all providers), but it is much tinier than this post suggests, at least for the category of people who are disciplined enough to pay off their balances monthly. The credit card companies call these people "deadbeats," and I believe they make up over 40% of credit card holders (though only 25% of student credit card holders).
I'm another second category person. I'm not so much shocked about the "liar" comment because it's just a silly comment, but more shocked by your logic. Paying your bill online virtually guarantees that your payment will be made on time. And so many advantages: convenience, safety, rewards, online transaction history.
Also consider this: if it's possible that your payment will get lost in the mail, then it's better to pay all your bills on your card, and just pay one bill through the mail rather than 10 through the mail. This will actually reduce your already rare chance of a payment being lost in the mail or online.
Finally, I am one of those people who thinks cash is much easier to spend than credit. I track all of my electronic transactions in Quicken, so a credit card transaction is definitely felt. Cash, on the other hand, is accounted for when withdrawn - after that it's like free money. Much better for me to stick with the electronic methods.
Track the expenses like a check register and you'll never spend more than you can pay off that month.
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