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 Excerpt	Checking Only	Checking and Savings	Savings 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

Conclusion

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.

8 Reasons to Keep Your Credit Card

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.

Warily Eyeing Credit Card Reward Programs

Are Credit Card Rewards Programs Worth The Trouble?

Currently we have two credit cards. One we've had since we got married, almost five years ago. The other we got when we switched to the credit union.

The old Visa card is through a large national bank, and is pretty crummy. 24% interest, no rewards. The only reason we haven't closed it is that it's the oldest piece of our credit history. We'll keep it around until our mortgage is secured, then we'll close our account with that bank.

The newer card gets 1% cash back at the end of the year. It's convenient that we can just transfer money from our savings or checking to the credit card account, all in one spot.

Our Spending Habits

Neither of us likes carrying cash. I hate having things in my pockets, and she loses stuff in her purse. As a result, we use our credit card everywhere we can, our debit card where that doesn't work, checks where debit cards aren't accepted and cash as a last resort.

We always pay of the entire balance each month.

Current Rewards Program

I guesstimate that this year we've been spending about $2,200 on our credit card each month. If 1% cash back works the way I'm assuming it does, that means we'll get $264 back at the end of the year (.01*$2200*12).

Other Reward Options

Thinking that I'll get $264 back and knowing my average monthly spending means that I can now start comparing other credit card offers and maximize my rewards. Some cards appear to offer really good deals with reasonable APRs and no annual fees.

Let's pretend for a minute that I really did get 5% back on all purchases (there are a couple of exceptions). Spending the same amount each month would then get me $1320 cash back. (0.05*2200*12).

Is this really how it works? If I use the card responsibly (paid off in full each month!) do I really stand to gain that much in cash back? Does anyone have experience with any of these types of cards?

Other Factors

Our credit union is local. We will be closing our accounts when we move in January. Since we don't like our other credit card or the bank it's through, we'll need to get a new credit card anyways.

The cards I listed all require having 'Excellent' credit. My credit score according to Credit Karma is 811. My wife's is similarly high. That along with a car loan in our name and regularly paid cell phone bills I think might put us in the 'Excellent' category.

I'm not fan of credit card hopping. I don't want to switch or open cards every year in response to good deals, so I don't care much about the introductory bonuses or APY; I want to find the card that will be best in the long run.

I've heard Dave Ramsey's and JD's calls to get rid of credit cards, but that's not how we live. We have both been pretty financially reasonable, even before we had a budget. We treat credit cards like we would guns: useful but dangerous tools that need to be treated with respect.


I'd love to hear other's advice and experience with these or similar cards.