Are Credit Cards Evil?
Credit Cards catch a lot of flack in the personal finance blog world and deservedly so. Many people have fought or are fighting mountains of credit card debt and feel that credit cards are unsafe.
Brack over at Goliath Debt, David Income is one of those people fighting back from debt. He is working on paying off "$68,000 in credit card debt, student loans, and a car loans". He recently asked if he should Cancel the Card? Or Be Prudent?.
Despite the risks of credit card use I still think they are a great too. I can't imagine having to carry cash or a checkbook everywhere so I am going to assume that the decision is between Credit Cards and Debit Cards. I think that keeping a Credit Card and being prudent with it is the best choice.
Eight Reasons To Use a Credit Card
Liability
The most you can be liable for a stolen credit card is $50 (if you report it correctly). With a debit card the limit is your bank account balance (plus overdraft!). See http://www.ftc.gov/bcp/conline/pubs/credit/atmcard.shtm
Built in Overdraft Protection
You have $50 left in your bank account and you're getting paid tomorrow. You buy $100 at the grocery store. With a credit card, there's no problem. With a debit card you will very likely have an overdraft charge.
This is assuming that you don't blow your credit limit of course. That kind of use wouldn't be prudent though.
Self control
As you use your CC wisely, you will improve your overall self control. This will benefit you in your financial life and in other areas of your life.
Earn Interest
It's seems silly to me to keep hundreds or thousands of dollars in your checking account when it could be earning money in a high-yield savings account or a money market account.
I put my paycheck into an ING savings account earning 3% APY. I pay off the credit card a few days before it's due. That gives me 25 or so days a month to have $1000 or more extra dollars in my savings account making me money. If that money was in my checking account, I'd make zilch.
Rewards
As I posted a few days ago, I am currently getting 1% cash back with my credit card. I'm not aware of any debit card that offers rewards, but if you are, please tell me!
Credit Score
If you have large loans in your immediate future, you probably want everything in your favor for a lower rate. If keeping even an unused no-annual fee credit card open will keep my credit score higher and make it easier to get a lower interest rate on my mortgage, you can bet I'm going to do it.
Benefits
Some Credit Cards offer benefits like car rental insurance. This can save you money if you use these services anyways.
Emergencies
If you do have an emergency, you will have the Credit Card to fall back on. No, it's not idea and yes you should use your emergency fund first, but debt is better than homelessness, missing meds, or other urgent situations.
Prudence is a Virtue
Essentially what you need to do is treat your Credit Card like a Debit Card. You can even write DEBIT on it with a sharpie if it will help you be responsible.
I come from a town where hunting is quite popular, but there's still a lot of controversy over guns. It seems that feelings among personal finance bloggers are similar, and I take the same position I do on guns:
They are useful tools if you use them right. If you use them incorrectly they are incredibly dangerous. If you or someone in your home can't use them safely, get them out. If everyone who will be using them can be safe with them, then by all means keep them around.
4 comments:
Excellent points, Rich! Some things I hadn't thought of...
Liability - I hadn't thought about that, but you are absolutely right - a debit card has more danger to it.
Credit Score - one of the things I need to blog about is how my credit score came in handy - my wife's new cell phone was made possible (we didn't have to pay full price for the phone or put down a deposit) by my good credit.
Benefits - I need to research this one - most cards offer discounts for various services, and I should be up on what each of my cards offer, and take advantage of those deals when I need to spend the money anyway...
Hey, I have my checking account with Regions Bank and their Visa Debit Card offers rewards. Thought you should know. Great post though!
disagree. You are talking yourself into reasons that havelittle merit.
Liability. Wrong. When used as a credit transaction, debit cards afford the EXACT SAME level of protection as a credit card,soif there is fraud, your bank account balance is replenished immediately
IF you practice #3 self control, you eliminate #2 Overdraft protection. DONT SPEND MONEY YOU DON't HAVE fixes alot of things
Why not keep the money in a high interest account and transfer itonline,free, to your checking account as needed. problem solved
Creditscore. Actually doesn't affect the score asmuch as many people think,and quite worring about your debt,i mean credit, score anyway
Rewards,benefits. Virtually useless. For most people the rewards/benefits do not outweigh the risks with credit cards
Emergencies. Have an emergency fund. Get a different line of credit. something other than a credit card. If itis a real emergency you likely won't need the money immediately so you will have some time after the emergency passes to round up the cash
poked holes in your entire theory.
Cut them up and quite dispensing crappy advice
Anonymous :
I've responded in more depth to the high-interest/rewards portions of your comments here:
http://richerandbetter.blogspot.com/2008/06/credit-card-reasons-revisited.html
And for quick coverage of your other points:
liability: Only Credit Cards have the protection backed by law. An individual Debit card may or may not depending on the contract.
If someone maxes your CC, you don't have to cover the expenses till it's resolved, if someone maxes your debit the bank doesn't have to cover expenses till it's resolved. (Again, may vary according to a specific contract, but in general this is the case)
Overdraft: What if there's a $100 balance and both you and your spouse spend it at the same time? There are corner cases where even self control can't cover.
And why would you keep more than you need in there when it could be in a high interest account?
Self Control:
DONT SPEND MONEY YOU DON't HAVE. I have never advocated spending money you don't have. I am advocating using Credit Cards as short term 0% interest loans while keeping your money in higher interest, less liquid assets (eg. Savings Account).
Credit Score: You don't know how much it affects your score. No one does. Fair Issac (the company behind FICO) doesn't release that information.
"you probably want everything in your favor for a lower rate" -- I don't know how much it affects it either. But since I'm applying for a mortgage in January, I'm going to certainly leave it open till after I've secured the mortgage just in case it does have a larger effect than anticipated.
Emergencies: In many cases you're right, but consider the following true life scenario which happened to me and my wife two years ago:
We had 'enough' money in our checking account and the rest in savings. We totaled our car in hicksville Nebraska. The medical bills could wait, yes. The surprise car rental, pain pills prescriptions needed to be paid for immediately. Use of a credit card allowed us to make those purchases. We later paid of the Credit Card with money from our savings account, no interest charged.
poked holes in your entire theory
I feel that all holes have been patched to a sufficient levels.
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