Friday, June 20, 2008

Credit Card Reasons Revisited

Anonymous Says No To $350

Or, How To Miss Out On $29.20 a Month By Not Using Credit Cards

I recently listed 8 reasons to use a Credit Card which caused someone under the bravery of 'Anonymous' to call my advice crappy.

I understand that Credit Cards can be trouble for some people and I have no problem with people disagreeing with me. I did however take issue with these two segments of his response:

Why not keep the money in a high interest account and transfer it online,free, to your checking account as needed. problem solved
Rewards,benefits. Virtually useless. For most people the rewards/benefits do not outweigh the risks with credit cards

Great idea! And if one wasn't using a Credit Card at all, I'd agree. However, I found the line 'Virtually useless' rather suspect. I decided to run an analysis and see for myself (and for you, dear reader) what exactly is the financial benefit of using a Credit Card in the manner I use it.

Remember, our financial plan says to use the Credit Card wherever possible (and to pay it off on time, every time).

My analysis involves the following three scenarios:

Scenarios Under Analysis

Checking Account Only

  • One 0% interest, $0 fees checking account

  • Salary goes in, checks come out

Checking Account and a 3% APY Savings Account

  • Salary goes into Savings

  • Money is transfer ed over as needed

3% APY Savings Account, 1% Cash Back Credit Card

  • Salary goes into Savings

  • All expenses go onto Credit Card

  • Credit Card is paid off at the end of the month

The Results!

With a monthly salary of $3,013.26 and monthly expenses of $2,187.50 using a 1% cash back credit card and a 3% APY savings account I will make $29.20 more a month than if I were just using a checking account. I will make you $24.96 more a month than if you I were using a checking and savings account (but no Credit Card).

See the whole sheet for a more detailed look including assumptions I made to simplify the calculations.

Table: Monthly Difference Between the Three Scenarios

Blog Sized ExcerptChecking OnlyChecking and SavingsSavings and Credit Card
Vs. Checking Only$0.00$4.24$29.20
Vs. Checking and Savings-$4.24$0.00$24.96
Vs. Savings and Credit-$29.20-$24.96$0.00

A Partial List of Flaws

  • Not everything can be paid for with a Credit Card.

  • Expenses aren't actually evenly distributed throughout the month

  • It is possible to get an interest bearing checking account

  • Using multiple savings accounts will give you finer grained control over transfers to the checking account

  • Some people really really really hate credit cards, so this won't work for them

  • Some limitations may apply to 1% cash back purchases

  • Carrying a balance even once will wipe out months of returns


I stick with my recommendation to use a Credit Card. I realize that my numbers are rough estimates, but I believe that they are strong enough and close enough to show that there is a clear financial benefit to using a Credit Card.

Using a Credit Card isn't for everyone, and I respect that, but just because they don't work for you doesn't magically make them crappy for everyone.

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