What Have You Got Against Credit Cards?

OK people, bring it on. Let’s throw some arguments from both sides of the table and discuss this issue.

I have got more than one reader say something to this effect:

What’s dumb about credit cards? There’s no emotional connection when using plastic. If you go to Lowe’s with a credit card vs. cash, studies indicate you are going to spend far more money using the card. Multiply that by all the transactions you do on plastic and you’ve got a lifetime of overspending. Most people think they’re the exception to this rule, but there’s a reason the retailers happily shell out tons of money to have those little card processing boxes on the counter - gross sales go through the roof. Ask McDonald’s.

Here are some sparks to start the fire:

Is the above comment a sound rationale against not using credit cards? or is that just masking one’s personal inability to understand/use credit cards properly?

Is debt due to credit cards or is it due to the lack of proper knowledge about handling credit cards?

Why do you (or don’t you) use credit cards? Emotional reasons or practical ones?

Be good to plastic (use it properly) and it will be good to you?

Rewards are a ripoff? or are they blessings for those who can use cards in a proper manner?

Don’t restrict your comments to the above questions ~ feel free to add any input you have got on this topic. Now, I could just cite some articles that argue either ways, but I want hear it from my readers.

For those who love credit cards for various reasons, here is your chance to defend your plastic.

You can be as critical as you want - so long as you don’t get personal. No name-calling please.

You can keep a track of subsequent comments on this post by checking the “subscribe to comments” box near the “submit” button in the comment box.

broknowrchlatrJun 7th, 2007 at 9:16 am

If you are good at managing money, you will not spend more with a credit card. It becomes a great tool in many respects.

If you are not good with money, you can’t be trusted with a credit card for equally many reasons.
FlexoJun 7th, 2007 at 9:47 am

I *love* how people write “Studies show how you…” As far as I know, I’ve never participated in a study of this type. I think what is meant to be said is, “Studies show how ‘the average consumer…’”
TimJun 7th, 2007 at 11:22 am

there’s a very real emotional connection when i use a credit card. i have to figure out which one will give me a larger deduction on the purchase. if i have cash in my wallet, as the saying goes, it burns a hole in it. cash seems to melt away when i carry it. i carry $20 in my wallet for places that don’t accept plastic.

plastic also gives me some protection, which if i carry cash and lose it, it’s gone.

plastic also is good, because i can use it to scrape off my windshield in the winter time. try to do that with a dollar bill.

plastic is good, because i can use it to pick a door.

plastic is good, because it is more sanitary than bills which absorb all those nasty things.

plastic is good, because i can use them in express check out lanes that do not require me to interact with a trainee.

plastic is good, because i can earn interest during the grace period.

plastic is good, because you can only carry $10k without having to pay duty when traveling.

plastic is good, because they are compact versus cash that you have to carry in a gangsta’ role, especially in some foreign countries.

plastic is good, because you don’t have to worry about getting a counterfeit bill.
Ted ValentineJun 7th, 2007 at 11:47 am

Credit cards are like guns. You know the saying that guns don’t kill people, people do? Well credit cards don’t get people in debt, people get themselves in debt. Credit cards, like guns, are just a tool than needs to be used properly or things will turn bad really fast.
msminiduckyJun 7th, 2007 at 1:20 pm

Credit cards aren’t to blame for people’s spending patterns. Obviously they’re geared towards making money for the credit card company, but not entirely without benefit to the conscious consumer. Whether or not you use credit cards is a choice in your financial life just as you make choices about which bank with particular interest rates and hoops to jump through that you’re going to use. If you can utilize them with caution and not get burned by the conditions, why not? If you know you can’t, then don’t. Pretty simple, I’d think.
Super SaverJun 7th, 2007 at 4:29 pm

Golbguru,

While I don’t have any hard evidence, I believe we are all paying 2-3% more on all goods since merchants need to recoup the fees that CC companies charge retailers.

Other than that I have no issue with using a credit card, especially if the retailer won’t give me a discount for paying cash.
golbguruJun 7th, 2007 at 7:28 pm

Man..I am surprised no one is speaking against the cards yet. Elsewhere, the anti-credit-card brigade seemed to be very vocal.

Personally, I am of the opinion that you guys have expressed above - credit cards are just tools - and you make them good or bad depending on how you use them. I have always felt that people tend to blame credit cards because it’s pretty difficult to admit one’s one financial mismanagement - it’s much easier to shift the blame on credit cards.

Super Saver: Yeah that is correct - there is a 2~3% surcharge that’s built into the price. However, most purchases (everyday stuff, groceries, supermarket purchases, online purchases) wouldn’t get you a discount on cash (of course exceptions are there….but they aren’t a regular feature). So most of the times, cash doesn’t give you the financial edge (now some people argue about a mental effect in handling cash…but I am skeptical about it). In that scenario, it might be best to use some rewards cards and make the best of the situation.
RichardJun 7th, 2007 at 9:15 pm

People always compare credit cards to money in your pocket… do you walk around with $[insert your credit limit here] in your pocket?
golbguruJun 7th, 2007 at 10:41 pm

Richard: Here is my situation - I don’t walk with $ in my pocket; so yeah, basically, I do walk around with credit limit in my pocket.

It has more to do with the kind of environment we live in here; I just don’t need the cash anywhere (credit cards work almost everywhere around here - except with barbers and laundries), and neither does cash sitting in my pocket give me any emotional support - so I don’t carry it.

But, I do understand that this is not possible everywhere - in some places having some cash in your pocket might be essential for certain day-to-day transactions.
KMCJun 8th, 2007 at 4:40 am

Not to be doom-and-gloom, but in a true emergency (like power outage, hurricane), a credit card won’t get you anywhere. Show someone bills and you’ll be able to buy stuff. I keep a small amount of cash in our ‘emergency supplies’ kit for this reason.
CorndogdriverJun 8th, 2007 at 6:13 am

I don’t care if you use cards or not. Someone has to prop up the profits of the banks my mutual funds own shares of.

Dun and Bradstreet did a study (you can pay to read it on their site) that indicated people spent 16-18% more using credit cards vs. cash.

MIT did one with students buying tickets to sporting events in which the credit spending students were willing to spend over double what those spending cash were willing to spend.

The book “Credit Card Nation” has a thorough description of spending habits with credit cards.

McDonald’s per transaction sales rose 40% (from $5 to $7) when they started accepting credit cards: http://www.cioinsight.com/article2/0,1540,1913638,00.asp

PBS Frontline http://www.pbs.org/wgbh/pages/frontline/shows/credit/ did an expose’ on the credit card industry that’s worth a look.

Here’s a question: if you have $20 in your pocket to buy gas, do you buy gas, or do you buy gas plus a Snickers and a Diet Coke? In other words, is it even POSSIBLE to overspend with cash?

And finally, what evidence is there for people’s tendency to overspend when using credit? How about the glaring example of the towering mountain of credit card debt Americans now find themselves buried under. Did they set out to go deeply in debt? Did they have a plan to ruin their financial lives? You know who’s got a plan? CitiBank.

Credit cards are designed to separate the joy of buying from the pain of paying. There is no emotional connection to plastic as there is to a $50 bill. When you buy lunch with a fifty, you feel it in a way that plastic innocuates you from. It’s the exact same concept that’s employed in casinos. They immediately separate you from your greenbacks and you play with “chips” not “real” money.
GeekManJun 8th, 2007 at 6:34 am

I’m surprised no one’s mentioned one of the best reasons for using plastic, itemization of purchases. The only reason my wife and I use plastic is because at the end of the month we have a full account of every penny we’ve spent. The only time we use cash is when there’s no other option.
golbguruJun 8th, 2007 at 9:27 am

KMC: Of course, I won’t discount the fact that cash may come in handy at times - it does. However, that does not make the use of credit cards invalid - they have their own place in the economy, if probably not for emergencies.

Corndogdriver: You did probably read Flexo’s comment earlier about how statistics are “averaged” - which means it’s not universally true.

I have mentioned this before - there is no way to distinguish if a person is using a credit just because the transaction is of a larger amount. For example, an incredible number of convenience stores don’t take credit cards below a certain amount - in which case, even a credit card lover would forcibly go in for cash - however if the amount of his purchases were higher, he would have very likely opted for his credit card. That’s just one example. The other thing is that a large number of credit card transactions occur online - now you would hardly hear anyone buying stuff worth of couple of bucks online - most prices tend to be of such a magnitude that would make the shipping costs worth it - that’s another reason why credit card averages seem higher than cash.

The mountain of debt you talk about is caused by people who can’t use (or don’t understand or deliberately abuse) credit cards. If buying things on credit “allows” you to live beyond your means - it doesn’t mean you should try and live beyond your means.

“When you buy lunch with a fifty, you feel it in a way that plastic innocuates you from.” that’s totally relative - in that spirit, I am sure that thoughts of a painful credit card statement makes people think twice too.

I am not sure how people go to McDonald’s - if you go in there to buy a Big Mac and coffee, I don’t see how you spend more by using credit card than by using cash. For those who have no idea about what to buy - they may end up spending more - but that’s true for even cash holders. Same is true for other expenses - if you have a proper budget, it just doesn’t matter if you use cash or credit cards.

GeekMan - yep, that’s a good thing, especially because it happens automatically. Now, people who spend cash also itemize stuff after purchases - but after having tried both the systems, I liked credit cards better. Plus, I aggregate all my cards using Yodlee, so the itemization is now sort of global and reflects my entire month’s expenses - that’s really helping in budgeting my stuff.
kittyJun 8th, 2007 at 9:31 am

Corndogdriver - you don’t seem to realize that most if not all people who posted don’t carry balances and pay their bills in full every month. The funny thing about studies that talk about the average is that they don’t show a thing as to an individual. Take one person who spends 100% more with a credit card and take 4 people who spend the same or slightly less, and you can claim that people spend 18-20% more with the credit card. “This desease mostly affects 50-year old men. There are two known cases -a 98 year old man and a 2 year old boy”. Show a study that only looked at those of us who pay our balances in full every month.

“In other words, is it even POSSIBLE to overspend with cash?”
Absolutely. There are ATMs at every corner. If $20 in your pocket is not enough and you want more - just go to a nearest ATM. Those of us who pay in full every month and don’t even consider the possibility of doing otherwise need to have full amount on our checking regardless of how we pay for purchases. It is especially true on the trips to foreign countries when once the money converted to a foreign currency, one feels almost “obligated” to spend it. Having coins of large denomination (1 pound, 5 euro) doesn’t help since one doesn’t feel the same about coins. When I use credit cards on these trips I know I am spending “in addition” to whatever cash I took out of ATM so I am much more careful with it, whereas once the money is converted, they are as good as spent.
Kitty (a different Kitty)Jun 8th, 2007 at 10:02 am

Credit cards are good. They give one a credit history and all the additional things that have been said already. That said, credit card companies are bad. Very bad. Because they charge interest? No - that’s just business. It’s because they target young people who have mostly not had the benefit of a sound financial education. When I was in grad school (making $5000/year as a grad assistant and otherwise living off student loans) I had 4 major credit cards, 3 store cards, 3 gas cards and 4 airline credit cards. Oh yeah, and a Zales card. They would send solicitations and all I had to do was put an “X” on them and I got a card. My parents were very private about finances and other than helping me start a small savings account when I was 9 I never got a financial education from them. In school the only math I learned was basic and not applied to real life situations. I didn’t learn about compound interest and how it could affect my life until I sought out that information at age 43. Credit and credit cards are good, but only for people who are educated in what it means to their financial future. In my opinion personal finance should be a mandatory course in high school and credit card companies should require a multiple choice personal finance test for all applicants.

Do I still sometimes make bad credit choices? Yes I do. About once a year I make a purchase that I later regret putting on plastic. But because I am now self-educated I make an immediate plan to remedy the situation by budgeting and it never becomes a hardship or credit juggling act.

On a side note I joined an investment club about 18 months ago. I have just resigned because of the insistence of the other members in keeping a stock for a payday loan company. Ethically I can’t justify making money off people who (in general) are in trouble because they can’t budget and are taking steps to get in bigger trouble.
Steve AustinJun 8th, 2007 at 10:19 am

I am a GD miser, so there is no psychological difference between modes of payment to me. I try to buy almost nothing (beyond subsistence) and try to spend as little as possible for it. Someone above said they use their credit card to pay for everything they possibly can, and have a stash of cash for emergencies. I pay cash for everything I possibly can, and have a credit card (limit $12,500) for emergencies.

Re: itemization, I agree there is no difference between modes, but it’s when one mixes modes that things get more complicated. It’s easy to itemize if you only use plastic; and it’s easy to itemize if you only use cash.

I point out that some of the reason given to use credit cards vis cash actually apply to debit cards (transacted as if they were credit cards) as well. I think it’s important to make this distinction and really only discuss cards with a credit line, i.e. those that do not immediately debit the transaction from your account. When you use a credit line, you know that you don’t have to pay for a month (or so). When you use a debit card or cash, you know that money is actually changing hands at that point in time (or very soon thereafter in the case of the debit card).
Steve AustinJun 8th, 2007 at 10:20 am

A second post to make my main point more prominent: I strongly prefer cash to cards (credit or debit) because I strongly dislike the fact that my spending history can be tracked via cards. It disturbs me that some analyst tool sits in an office somewhere and crunches marketing numbers based upon my purchases, and runs software that puts my name/address/e-mail address/phone number on someone’s solicitation list. Whenever you take out a loan or open a credit card line, you are associating your SSN with your payments and purchases.

I find that invasive. It’s not that I have something to hide regarding my spending patterns; but most importantly, neither do I have something to share about what I buy, where, and how often. The convenience of the card mode of payment is an insidious social convention. Commonly heard in this thread: “What’s the big deal? Credit cards are so easy to use, and they save me money!” I treasure my right to privacy, that the US Constitution allows us people to retain per the 9th amendment. When I borrow money or open a line of credit and spend against it, I voluntarily waive that right to privacy. Convenience and supposed rebates are little solace to me in this regard, and much less important to me than my privacy.

I’m not over the top about this: I still use plastic (my debit card) for commercial airtravel, but then commercial airtravel itself is rarely private so I’m not really gaining anything by using cash in that case.
KevinJun 8th, 2007 at 11:35 am

Credit cards are a POWERFUL tool — just like a chainsaw. You can do amazing things with it as long as you are paying extremely close attention. Let your focus waver and you’ll be in a world of hurt!

We got our credit cards under control via a spending plan (something I harp on constantly as the #1 financial tool you can have). It doesn’t matter if we use cash or credit: when we buy it, the amount gets deducted from our remaining spending budget for the week. That way we are living within our means and can always cover the purchases when the bill comes.
TimJun 8th, 2007 at 12:00 pm

my debit card gives me 15cents every time i use it regardless of the amount. my credit card gives me discount in terms of cash back for purchases…both of which are not available for cash purchases.
JamesJun 8th, 2007 at 5:17 pm

The thing about credit cards is that the companies can charge you essentially whatever they want.

Getting cash back at 1% when you are being charged 19% or more is silly. People focus on the benefits of cards, when in fact they are being ripped off.

Best,

James
RichardJun 8th, 2007 at 5:20 pm

@James: While you may be right, getting cash back at 1%, when you AREN’T being charged anything (i.e. you pay your balance in full every month), sounds like a good deal to me.
MoneyNingJun 8th, 2007 at 7:48 pm

I try to always use my credit card whenever possible because of the cash back. I don’t see why I would spend more using a credit card than if I use cash. I think people end up spending 20% more because the average American has $10,000 dollars in debt.
Amy BassJun 9th, 2007 at 6:37 pm

I totally agree about credit cards. They are trouble. I got rid of mine and am working my way towards debt freedom. My goal is to pay off $72,900 worth of debt by April 2009. I am keeping track of it on my Debt Payoff blog.
You have a great blog and I plan to visit again. =)
Valerie S.Jun 10th, 2007 at 9:54 am

Credit cards are OK and handy IF you understand them and pay them off in full each month. The rebates, especially if cash, can be good.

But too many people think nothing of making part payments monthly and their balances go on and on. I once encountered a travel agent years ago who, surprised that I asked when a refund would appear on my credit card (I wanted to know whether I’d have to pay the amount due before the credit appeared), told me she NEVER paid the full amount “because it’s good for my credit rating to have an unpaid balance”!

Kitty (another Kitty) is right…we don’t educate kids about finance and relate their math courses (from grammar school up) to real life situations. They don’t know about interest rates on time payments, mortgages, closing costs, nor even how to fill out their Income Tax returns! Hardly education for real life!

Back in the Dark Ages when I was in 7th grade, our Math teacher had the local bank bring in blank checks and registers, and we learned how to write checks, record them in the register, figure out compound interest (by hand…no calculators then!) and reconcile a check book. Of course, at home, my folks were doing the same by showing me how they kept track of bank accounts, and taught me that the then-popular “Christmas Accounts” were not very good because they paid no interest and your money was tied up all year.

When I realized that my own kids were getting nothing like this in school by the time they were in 8th grade, I began letting them write and record our monthly bill checks, which I then signed. When the statements came in, I let them reconcile. When they got to college, they told me that they were among the very few entering students who knew how to manage a checking account!

In any event, few kids today realize what really happens with interest on part payments to credit cards and how much it can add up to over the basic cost of purchases.

We pay our credit cards in full every month, but even I, fairly sophisticated in money management, was shocked last month when I accidently transposed the cents in my credit card payment by two or three cents and ended up with a $1.72 credit charge! When I called in, they identified the problem (which I’d missed,) and refunded the charge because my payment record was so good. When I asked why the charge was so high on a few cents, they told me it was charged against my whole balance due, not just on the amount unpaid.

How many people realize this?
JamesJun 10th, 2007 at 10:22 am

Richard, the major problem is that, of households with credit cards, 58% DON’T pay off their debts (this from the Federal reserve’s survey of consumer finance). So MOST people don’t pay off their credit cards.

Plus, if you look at the abusive practices carried out my many members of the industry, including “reputable” outfits like Citigroup, it becomes quite obvious that credit cards should be categorically avoided.

It totally drives me bonkers when people say, “Oh sure, I use my card because I get 1% cash back”, its like they feel they are making money off the card company, when in reality the economic and legal circumstances of the borrower/lender relationship are such that the card companies are making money off of YOU, the consumer, not the other way around.

My advice switch to a debit card and pay as you go. If you don’t have the money, don’t spend it.

Best,

James
RichardJun 10th, 2007 at 10:33 am

James, I’m not talking about the 58% that *don’t* pay off their debts. That’s their issue. I’m talking about the 42% that only spend what they have, but do so on their credit cards rather than using their debit cards or cash.

I can then have my actual cash earning 5%+ interest for the entire month in a high-yield MMA/savings/checking account, while getting cash back on the money I borrowed. At the end of the month, I pay off what I borrowed in full.

Sure, it takes some discipline, but one is able to do that successfully, how then do the economic and legal circumstances of the borrower/lender relationship allow the card companies to make money off of me, and not the other way around?
golbguruJun 10th, 2007 at 11:42 am

James: “It totally drives me bonkers when people say, “Oh sure, I use my card because I get 1% cash back”, its like they feel they are making money off the card company..”

Given a particular situation - say a shopping spree in a supermarket, groceries store, etc. - assuming that economic and legal circumstances have already raised the prices - why would you not take advantage of the situation and at least salvage a bit of what you are paying - through rewards/cashback? You could the exact same amount of cash and wouldn’t get anything in return.

Another example is airline miles - I don’t think any airline is going to reduce the price of your ticket because you pay cash (or with a debit card) ~ in that case why not take advantage of a proper credit card and earn some miles while your buying the tickets you need?

If credit card companies are making money off the consumer, they are doing it whether you use credit cards or not - it’s there in the sticker price. If that’s the case, wouldn’t you be in a better position to get some back in the form of cash back? [Of course, assuming that you pay off your balance with every statement - so that you don’t loose more in interest]
Kitty (first Kitty)Jun 10th, 2007 at 2:29 pm

James, as Richard said, why should those of us who belong to the 42% who ALWAYS pay our balances in full every month should stop using credit cards because some people we don’t even know are in debt? I fail to see the logic. Some people are alcoholics too. Shall we all stop drinking wine in sympathy?

I found your comment “live within your means” pretty insulting since most posters here said they pay in full every month which means we do live within our means. I’ve never bought a single thing I couldn’t afford and I don’t buy everything I could afford either, although I am not frugal. I don’t believe I spend more with a credit card than I would’ve otherwise. For any of my purchases I would’ve paid with cash if a merchant offered me an immediate discount exceeding the cashback.

Credit cards have a form people can fill out to have a full balance deducted automatically. Very convenient.

Tell me, why should I gave up using credit cards that I’ve been using for over 20 years, have never paid a penny in interest, have no debt: paid off my 400K townhouse a couple of years ago; paid cash for my new Honda Civic? I am doing OK financially (in spite of the fact that when I immigrated to the US at the age of 19, I had nothing), and I’ve used credit cards ever since I got one after graduate school. As far as “people spend more with credit cards” argument goes, it is not at all clear that it applies to those of us that pay in full. When my parents got their first credit card in the US, a couple of years after we immigrated, they didn’t go on a spending spree. In fact, their spending habits haven’t changed at all. Nor have we had any “financial education” in then-communist country we immigrated from, just a lot of common sense. I do know math fairly well - I am a software engineer - but you don’t need a lot of math to know that they charge high percentage, much higher than what you can get at a bank.

Credit cards are convenient if you pay in full every month - a) your money earn interest during grace period b) you get cashbacks which IF YOU PAY IN FULL is free money c) you get fraud protection - much stronger than with debit cards d) credit cards are a necessity when travelling, especially because of fraud protection.

All of your arguments are centered around people who carry balances. None of your arguments apply to those of us who pay our balances in full every month and don’t even consider the possibility of doing otherwise.
JamesJun 10th, 2007 at 5:05 pm

I’d like to thank Richard, Goldguru and Kitty for responding to my message. Its great that Golbguru has made this forum available on his webpage.

First off, the incentives programs, I believe are a calculated business decision by credit card companies to retain business. The main revenue stream for these companies is lending money at high interest rates.

Second, the contracts people sign when they
agree to credit cards are inherently designed to camoflage the fact that the companies can charge you whatever they want. If you don’t believe me, have a look at the fine print on your next credit card offer. I guarantee that you won’t like what you see.

So, by using your card to get the 1% back, you’re placing yourself in a situation where you are contractually obligated to pay whatever the credit card company wants you too.

Present company excluded, getting into that kind of borrower/lender relationship is dumb.

Best,

James
RichardJun 10th, 2007 at 5:59 pm

James, if you would, please name ONE incident for me please, where someone paid their balance IN FULL by their due date, and was charged some fee, or was then forced to pay “whatever the credit card company wanted them to”.

I’m certain that you can’t.

Point being, the circumstance you allude to ONLY occurs if you don’t pay what you borrowed back in full. Sure, if you default, or pay minimum payments only, you’re quite likely going to be charged since you’re still BORROWING money. Now, it’s one’s own decision to go down *that* road (not knocking anyone here, just stating a fact). And if you find yourself in that situation, THEN I can see your beef with credit card companies.

But again, I would ask you… how am *I* prejudiced by using credit cards, if *I* pay my balance in full every month? I get my cashback/miles/rewards, and my ACTUAL money gets to earn it’s interest for the time in the interim. Really, how is this BAD for me?
Kitty (first Kitty)Jun 10th, 2007 at 6:13 pm

“…the contracts people sign when they
agree to credit cards are inherently designed to camoflage the fact that the companies can charge you whatever they want.”
They can absolutely charge whatever they want IF YOU DON’t PAY YOUR BALANCE IN FULL by the due date. If you always pay your balance in full every month they charge you only for your purchases. Since I have the full balance amount automatically deducted from my checking, I couldn’t care less what they can do to me if I don’t pay in full.

If you have your full balance automatically deducted from your checking every month, you don’t care if they change the due date as long as you never spend more than what you have on your account. You don’t even care if the check or the bill gets lost in the mail. They will still deduct the full balance and not a penny more. Incidentally, with automatic payment they deduct the amount on the due date thus giving you the advantage of the full grace period.

“So, by using your card to get the 1% back, you’re placing yourself in a situation where you are contractually obligated to pay whatever the credit card company wants you too.”
Only if you don’t pay in full. Why is this concept so difficult to grasp? 42% of Americans do that without getting in trouble. This may be minority, but it is still a lot of people.

Another advantage of credit cards, by the way, is that you have a disagreement with a merchant you can stop payment. Sometimes just a threat to stop payment when something is not delivered in proper condition works.
Kitty (first Kitty)Jun 10th, 2007 at 6:15 pm

Oops, Richard, I was typing at the same time you did, so I wrote essentially the same arguments… Woudn’t have if I’d seen your post before.
golbguruJun 10th, 2007 at 7:50 pm

James, and others who have been voiced concerns about unfair terms and conditions (T&Cs) used by credit card companies:

I just want it to be clear that (the way I understand it), those who are putting pro-credit arguments above don’t necessarily condone unfair measures implemented by the industry.

Practices like two-cycle billing, monstrous default interest rates, etc., are unfair and protests against such specific evils are fully warranted.

However, I would appreciate it if you look at the pro-cards arguments from this perspective - a blanket statement like “credit cards are bad” is not necessarily valid given a large number of people who do use them properly without causing themselves grief (in fact they are making credit cards work for them).

I am glad you expressed your personal opinions openly because I know a lot of people who adhere to those anti-card concepts (for example, according to my current observation, some fans of Dave Ramsey just absolutely hate credit cards - without any concrete reasons to do so). It’s essential that these people openly express such concerns often, so that the rest of us can try to alleviate some of the them.

I really need to thank all you guys (both pro and anti) for bringing up some excellent points for discussion.

Back to some more arguments - do you guys (who are totally against credit cards) think that ALL people who use cash-only are absolutely not in debt? I will find that hard to believe. I am pretty sure there are a lot of cash-only people who are a subset of people who are in debt.
CorndogdriverJun 11th, 2007 at 8:16 pm

The whole idea of spending more when using plastic, separating pleasure of purchase from pain of payment, the intentionally built-in rationalizations for spending more (”I get cash back/airline miles/college savings program/carbon emissions credits/free T-Shirt”)have all been neatly sidestepped with a sweeping “yeah, but that doesn’t apply to me”.

Another neatly-brushed off factoid is how much money we’re actually taking about in this amazing interest rate spread everyone is so proud of: say you spend 2 grand a month thru a rewards card and get 1% cash back. 2000×12=24,000x.01=$240/year!! Woo-hoo!! But I kept MY money in a high-interest MMA, Corndogdriver, you knuckle-dragging misanthrope. OK, let’s see: 2,000x.05=$100/year or $8.33/month I get in FREE MONEY by keeping mine invested all month instead of paying cash! Move over Warren Buffet!

My challenge is simple: if your credit cards are not a crutch and do not cause you to spend more, transition to all-cash for 2 or 3 months. Plan out how much you’re going to spend on the various categories you’d normally use the plastic for: gas, groceries, whatever. Put that much cash in an envelope and see if spending out of that envelope and knowing when it’s gone it’s gone impacts your spending decisions.

Heck, you may even like the fact that when you buy something, that’s the end of it - there’s no bill coming and no possibility you’ve overspent.
RichardJun 11th, 2007 at 9:54 pm

So that’s $240 + $100 = $340. Assuming of course all I get is 1% cash back, which is hardly the case. In any case, feel free to send me a check for $340 every year. Thanks.
CorndogdriverJun 12th, 2007 at 4:24 am

>

Transition to cash and you’ll save that much in the first 3 months. Incredulous? Try it.
RichardJun 12th, 2007 at 7:29 am

All that will do is force me to have a lot more additional cash on hand.

Look, the point here is simply, credit cards, if used responsibly, can actually work to your benefit. It’s as simple as that.
CorndogdriverJun 12th, 2007 at 9:44 am

The point I’m making however is that the benefits you cite are illusions compared to how much extra money you’d have if you quit using them. It’s their game. You’re not going to win it. They’re still making money off you, but you don’t want to see it. The only way you will ever believe you’re overspending using plastic is to use cash only for a few months. By “overspending”, I’m not talking about impulsing a new $6,000 plasma screen TV. I’m talking about myriad 50 cent to 2 dollar additions that the retailers know you’re going to make - which is why they pay the fees to have that little card processsing box at 7/11 and McDonald’s. They don’t think you’re going to freak out and buy out the franchise because they put a card box on the counter - they just know they’re going to win most of the “spend/don’t spend” tie-breakers now.
RichardJun 12th, 2007 at 12:33 pm

@Corndogdriver

Even if you were correct on that point (and again, DISCIPLINE would be my simple response to that), what would be your equivalent argument when considering other types of rewards, such as airline miles? What.. am I going to spontaneously buy an extra plane ticket or three because I have a credit card?

After you answer that one, please tell me how the FREE trips I (a frequent traveler) earn by using credit cards is disadvantageous to me.

Even if I constrained by rewards credit card usage for relatively large purchases only, I’d STILL be better off using the credit card versus using cash. Even a 1% cashback on that $6,000 plasma screen, is $60 back into my pocket. That may not mean much to you, but I’m sure it does to a lot of folks.

Now, again going back to the issue of discipline… if you run about buying $6,000 plasma screens arbitrarily when you don’t have the means to do so (i.e. you’re just doing it because you’re able to put it on credit), THEN you have a problem. A pretty big one too.

But if you’re disciplined enough to create a spending plan and STICK to it, then it won’t matter whether you pay in money, sea shells, or gold bullion, or whether you pay using paper, plastic, or cardboard. At the end of the day, you budgeted to spend that amount and that’s it. And it all comes down to just that.
Steve AustinJun 12th, 2007 at 1:01 pm

Corndogdriver’s view that “it’s their game” is compelling. It’s hard to see from the consumer perspective, but if you put yourself in the vendor’s shoes, why do they do it (offer means for consumer’s to make credit card payments)? They do it because it is profitable. By definition, what a business does it profitable, else it fails as a business and ceases to exist (at least in that configuration). Whatever incentives you as a consumer perceive as a consequence of your credit card transactions, are outweighed by the profits of the businesses on the other end of those transactions. It’s similar to the Other People’s Money myth: who do you think makes out better when you use other people’s money, you (the borrower) or the other people (the lender)?

I do like the fact that a cash transaction is immediately complete. No billing, no reconciliation of accounts, no transfers. Using credit cards invites unwanted solicitations, bills, and e-mail into my home.
RichardJun 12th, 2007 at 1:49 pm

Steve, yet again, I believe this goes back to a matter of discipline. Remember James referred to the 58% of people who DON’T pay their balances in full? THAT’S where the credit card companies make their money from. And they remain profitable because apparently, people will continue to not pay in full.

But if I fall into the 42% who DO pay their balances in full every month, so that I NEVER pay a penny more than what I actually borrowed, and in fact end up RECEIVING money/miles/etc, then don’t I come out on top of this “game”?

It would seem as though it’s a win-win-lose situation — credit card companies WIN; people who pay their balances in FULL every month WIN; people who carry balances over to the next month LOSE.
CorndogdriverJun 12th, 2007 at 1:51 pm

The credit card companies buy huge blocks of frequent flyer miles. Why? To further incentivize spending (”well, at least I’m getting frequent flyer miles…”). The airlines are more than happy to sell these frequent flyer miles - at a deep discount. Why? Because Consumer Digest says almost 80% of frequent flyer miles are never redeemed. Plus, airlines know how to manipulate the rules of redemption to corral you into flying when it costs them the least.

As I said: if you have such tight control over your spending, switching to cash for a 3 or 4 month test will be a snap. Just put the amount of money you budget monthly for each spending category into an envelope and spend it till it’s gone. Then you’re done. No more spending. See if that paradigm doesn’t subtly alter your spending decisions. If you’re right and you find you don’t spend less in a category so you can spend it somewhere fun like taking Wifey out for a romantical dinner at Goofy Burger, then you’re no worse off. Back to the rewards card you go. But until you introduce the “once it’s spent, it’s gone” paradigm you’ll never know.

Best to you.
Steve AustinJun 12th, 2007 at 5:16 pm

Richard, I am doubtful that paying card balances in full each month equates to discipline (but am agreed that it’s better than carrying a balance). Credit card transaction incentives insidiously undermine discipline. The cash payer has no such incentives and is therefore naturally more disciplined than the credit card payer.

Regarding miles, what do you do with those card miles? Do you travel somewhere and spend more money at that destination than you would have if you didn’t get card miles, and perhaps you wouldn’t even have made that extra “free” trip?

What do you do with card cash back? Do you save it, or do you inflate your spending budget to accommodate the additional “free” goods and services you can now purchase with it?

When you use a credit card to make purchases, the companies that sold you those items or services can now “better” solicit you for additional purchases. Having to receive and even bothering to ignore those solicitations imparts a non-trivial cost (time, distraction) on your life.

Credit card companies must love it when customers say that it’s a win-win situation. There is no free lunch here. Credit card companies have convinced you that you are getting a good deal (better than those other card companies) by giving you something “free” that they have pre-arranged with partners and vendors, and shared the cost of those incentives with them. They have systematically demonstrated to themselves and their partners that you (and those like you) will spend at least that much more money each month. Your spending patterns are analyzable, you are reachable, you can be solicited on a routine and programmatic basis. You are in their system — they wouldn’t maintain such a system if it wasn’t more profitable than giving you no incentive and letting you fall back into the untouchable life of a cash-paying, underconsumer.
RichardJun 12th, 2007 at 6:11 pm

Steve, the discipline of which I speak is simply not living beyond one’s means. You have only $1,000 in your bank account? Then limit your spending accordingly. When I say discipline, I mean for everything that you put on your credit, ensure that you already have cash on hand to pay for it. I mean to create a budget and firmly stick to it. Financial discipline is a combination of things, and paying one’s balances in full every month is not the end all and be all of it.

With those miles, I can do several things. Perhaps the best example, however, is that I can take a trip that *I was already planning to take* for free.

What about the extra cash you say? If I choose to “inflate my budget” based on that cash, then really, that’s my choice to make. So if I feel like pampering myself or the wifey as a result, I’m well within my right to do so. However, the cash can be used for less sinister means such as investing. Either way, I’m not entirely sure how one could argue that receiving money is a BAD thing….

Regarding solicitations… first off, some people enjoy them. Many people take advantage of 0% no-fee arbitrage offers that they’ve received in exactly this manner, and have reported profiting as a result. If you don’t like them, in many cases, you can opt-out (albeit you may have to do some diggng to find out how).

Analyzable spending patterns? Recorded purchasing history? Check and check. Again, I think at least one person has already said that these very things simplify their own finances. In fact, a number of financial aggregators use this data to help YOU with your finances (Yodlee, for example). If you don’t like these aspects, then fine… to each his own.

There is no free lunch… but that’s contextually based. Some people here have already testified that they have NEVER paid a penny in interest, yet continue to yield profits in arbritage and rewards. Many people don’t mind sacrificing their purchasing history being aggregated, and perhaps even shared with others.

You’re right… credit card companies find ways to make their buck. But all I’m saying is that it does NOT have to be at YOUR expense. You hear stories all the time about people with oodles of credit card debt. THEY’RE the people the companies are making money off on. For the rest of us, the rewards alone are close enough to that free lunch.

And you know, Miel from Dinks made a VERY good point as well that I haven’t as yet mentioned: Using credit cards responsibly over time IMPROVES YOUR FICO SCORE! How many people do you think can afford to buy a house without a mortgage? If you can, good for you. But for the rest of us, home loan it is. And what is the single largest determining factor in the interest rate you get on that mortgage? That’s right, your FICO score. And you most certainly do NOT raise your FICO by spending cash all your life.
kittyJun 12th, 2007 at 7:43 pm

I don’t believe those of us who pay our balances in full make a decision to buy something specifically because of the incentives. It would be stupid to do so. Do you always buy stuff just because it is on sale? If a 30% off is not a compelling incentive to buy something you don’t really need, why do you think a 1% in cashback would be different?

As far as paying for everything in cash. I do it every time when I visit a country where credit cards are only accepted in places I consider too overpriced to buy anything. Guess what. I don’t spend any less there. In fact, I don’t remember the last time when I brought anything at all with me from a trip to a Western Europe - I like some things there but don’t like the prices (even if I can afford them), whereas I brought a few items I didn’t really need from a trip to my native country where I paid for everything in cash.

If someone wants to treat a wify one can do it on cash as much as on credit. If you pay in full every month, you know you cannot spend more than you have; if you use a debit card you cannot spend more than you have. There is no magic difference here except for people who cannot be trusted with a credit card because they used to carry a debt. I wonder what percentage of the people who are so adamantly against credit card are in this category. If this is the case, wouldn’t it be a little like a recovering alcoholic trying to convince someone without a problem of the dangers of alcohol?
Steve AustinJun 13th, 2007 at 5:23 am

well I suppose you (Richard and Kitty) have convinced me for now that you are disciplined with your use of credit cards and incentives, in the way that I understand discipline.

Since we’re kicking around anecdotes here, allow me to summarize my own situation: used to have a home with a mortgage (never missed a payment), used to use credit cards (or debit cards) for all possible transactions, used to receive all sorts of credit related junk mail, used to receive my credit card statement (which I always paid in full) and think that it didn’t feel like I spent that much money the previous month; then I sold the house / paid off the mortgage, (also sold the car), got rid of all credit cards save one for emergency purposes (in case we need to rent a car, they require a credit card for security deposit purposes), now use cash for everything (except debit card for air travel ticket purchase), got a PO Box so we receive no mail at home (renter now), other than family and friends no one bothers us at home (for example, because of what we products or services have previously bought or sold), and I never wonder how much I spent the previous month because it doesn’t matter: I only bought what I needed, when I needed it, with cash. I no longer care about FICO scores, and wish that I had no score (not 0) and no credit reporting history. I suppose if I do this little experiment long enough, my credit report will dry up with the exception of that one emergency credit card.

Most importantly, personal savings rate went from around 40-50% of gross income when owning a home w/ a mortgage and using cards for all purchases, to 70-80% of gross income when renting a home and using cash for all purchases. This is significant, and after several years of this I have calculated a strong possibility of early retirement in the very near future. I’m not an accountant, but I think that extra 30% of gross income saved must more than make up for any incentives or leverage I enjoyed being an Other People Money’er and card-user.

I submit this as anecdotal evidence that when you fall for the OPM myth, you (i.e. I) buy more than you (i.e. I) need. Of course, anecdotal evidence is not all that convincing because of all the parts of and assumptions underlying the anecdote that are unique to the story teller. But no less convincing than Kitty’s anecdote about bringing home goods from Africa vis Europe (perhaps it was the continent of origin that made the difference, not the mode of payment? perhaps if the modes of payment were reversed in those countries, Kitty would have brought home more European goods than she did African goods in the given case?) And no less convincing than Richard’s anecdote about treating wifey with incentive products and money (really no way of establishing how much more or less wifey could/would be treated under the all-cash approach — Richard would have to try it, and I’m not suggesting that he change his life on account of an exchange of blog comments.)

I appreciate all the discussion on this. Based on what you (Richard, Kitty, et. al.) have said, I think you are more disciplined in your budget than I ever would or could be (and recall that I never paid credit card interest, always paid in full each month). But something significant happened when I stopped all financial relationships with money lenders of any variety. So I have to wonder what even you disciplined folk could save extra each month under the all-cash approach. If it saved me (less disciplined) 30% of my gross income, couldn’t it possibly save you (more disciplined) 10% or so?

Richard, what is Yodlee? Sounds like a scheme to me. I suppose I should look into it just to see what benefit I can imagine, even though the term “financial aggregator” makes my stomach turn.
RichardJun 13th, 2007 at 8:43 am

Steve, I certainly believe that a cash-only lifestyle can work very well for many people, as it has done for you. The point I was trying to get across was essentially that credit cards and OPM can work FOR you, instead of AGAINST you, if handled properly and responsibly. As James mentioned, it seems as though a number of people do NOT do so, however, and those people would probably be better off taking a page from your book. But I just can’t see how one can tell someone making thousands on arbitrage/yr, and earning various rewards on purchases he/she would make anyway, that credit cards are BAD for him/her. (Not to mention FICO score improvements, that could potentially save you hundreds of thousands in interest on large loans, like mortgages).

Either way, there are good points for both sides of this debate. It just irks me when people carte blanche write off credit cards as “evil” or “for the stupid”.

Yodlee (http://moneycenter.yodlee.com) is a free tool that allows you to consolidate a number of your resources, particularly financial ones. I began to use them as a single place to reference all of my frequent flier rewards programs — it can access them all simultaneouly and display the balance in each. I eventually expanded my usage to include my bank/loan/credit card/investment/retirement accounts — it can login to all of these and pull your balance information, transactions, your various holdings (in the case of investments/retirement), etc. A very handy tool indeed — gives you a snapshot of your financial situation at any point in time. Also has spending reports, pie charts, search functions (how much did I pay in, say, phone services last month?), etc. Very handy. Did I mention free? A lot of institutions (BoA, HSBC I think, etc) use them to provide their own interfaces (I believe that’s where they make their money). You’ll obviously have to trust them though, since you’ll be entering all your account login information. (I can see you having a problem with that Steve :))
golbguruJun 13th, 2007 at 9:17 am

Richard - “It just irks me when people carte blanche write off credit cards as “evil” or “for the stupid”.” - I have the same thing to say. Also, I have observed that strong reactions against credit cards come from people who use cash and with a very broad brush some of them try to portray it as “stupid” and I don’t like this forcible yardstick.

Btw, I am a great fan of Yodlee and have written more than a couple of articles on this blog about using Yodlee to simplify bill payments and stuff. I had my doubts about trusting them, but is HSBC can do it, then I don’t have a problem.

Also, from some of the comments above, you would almost get an impression that people who use cash are never in debt; never spend more than what they earn; and are always financially better off than people who use credit cards. I am sure that’s not the case. I would be glad if someone has any numbers on such things.
kittyJun 13th, 2007 at 2:12 pm

Steve, as Richard says it’s great that you are happy with your current lifestyle.

I’d like to point out a couple of things in your post. Among all the changes you list is no longer having a mortgage and a house and not having a car. There are major expenses. After I paid off my mortgage, I also started saving significantly higher portion of my salary.

In addition, if you don’t have a car doesn’t it mean that you don’t drive to stores as often? If you don’t go shopping as often, wouldn’t you spend less regardless of how you pay when you do shop. Do you work from home, walk to work or take transportation? In the latter case, does it cost more or less to get around?

Just these items are probably enough to account for an increase in savings. Unless you took thse items in consideration when figuring out how much using only cash saves you as opposed to credit cards, how can you be sure that not using credit cards any more is the major contributor to your being able to save more?

Personally I think it is really different for every person. Some people regret parting with cash more and treat credit line as spending money; others consider any money that already left checking or saving account as spent. I’d imagine that for most people who live within their means and pay their balance in full, it doesn’t make that much difference. One huge monthly bill and the need to part with this big amount at once is a pretty strong incentive not to spend too much again. I think the statistics is a bit screwed up here because of all the people who spend a lot more that what they can afford.
MoneymonkJun 13th, 2007 at 2:13 pm

I tried to post a few days ago, but your website did not allow me.

Credit cards suppose to be for emergencies, whatever happened to that? The credit card is replaced the emergency fund.

We all know more than half of credit card holders do not pay their balance in full every month.

Airline miles and rebates you can forget it, that usually comes with a price.

Stay away from credit cards and build wealth!!

I do not have credit card and proud of it.
CorndogdriverJun 13th, 2007 at 3:51 pm

I cannot for the life of me understand how I’m supposed to go in debt if I don’t borrow money. Golbguru has asked several times why it follows that people who use cash are not in debt. Umm…. unless they carried the debt into an all-cash lifestyle there’s quite literally no way to be in debt. If you have your grocery cash in your wallet and you spend it - even more than you planned to spend - you’re still not in debt. What am I missing?

On the other hand, those of you who use credit cards and pay in full every month (that rarest of birds) - are in debt. If you cut up the card and closed the account tomorrow you’d still have to write two checks to get them out of your life. I only mention it because “payers in full” often don’t think of themselves as in debt.

As an aside, why do credit card companies keep sending you dutiful “payers in full” more and more card offers if they’re losing money on you?
RichardJun 13th, 2007 at 4:24 pm

Go kitty!

@Moneymonk
Yes, we know that most people don’t pay their balances in full every month. What about those who do?

What price am I paying for airline miles and rebates? I recently applied for and was approved for the Chase Freedom card during the $250 promotion. I received a check from them for $250 about a month after. This card has no annual fee. I also get 3% cashback at certain types of stores, and 1% otherwise. So again, what’s this hidden price that I’m paying again?

@Corndogdiver
You can borrow money without having a credit card…. Loans for example? Student/auto/home/personal…. You can rack up a lot of cash in hand through loans without ever going through a piece of plastic.

I can only imagine that credit card companies that continue to send more offers to “payers in full” (PIF?) because 1) they can, and 2) hope. If I make a few thousand a year on rewards/arbitrage, how much does that REALLY cost them? Compare that now to how much they stand to make if I screw up. I suppose one might also say that there’s a psychological element as well the ploy being I suppose — more credit cards = greater usage = greater integration of plastic in your life = dependency = more opportunity for you to screw up. Who knows.

At the end of the day though, you simply need to be on top of your game, and.. well.. don’t screw up. If that sounds too risky for some people, then, thanks for playing.

An additional comment on that point… I’ve read on another blog somewhere (can’t quite remember which right now) that after making a mint on cc arbitrage, the 0% no-fee offers slowly began to dry up….
golbguruJun 13th, 2007 at 4:27 pm

Corndogdriver: Credit cards are not the only source to borrow money from. For those who carry cash (or don’t have credit cards) there are things like overdraft line of credit, home equity line of credit, payday loans, and a lot of other loans. Just because you use cash for grocery purchases doesn’t make you debt free or give you “financial freedom” - as some of you implied above. The only point I am trying to make is that the difference between debt-and-no-debt or between financially-successful-and-not-successful is not completely defined by just the difference between credit-card-and-no-credit-card.

As for the more credit card offers - it’s a bait - and a fisherman’s job is to keep throwing his bait - however, smart fish know the difference between a bait and food. (don’t get into the technicalities of smart fish - it’s just an analogy)

[Richard - I guess we were typing our comments at the same time - so some of the stuff your said got repeated in this one]
Steve AustinJun 13th, 2007 at 5:38 pm

Richard, the need to be on top of one’s game when playing card arbitrage is a cost (time) in itself that I won’t incur by operating with cash where at all possible. And you’re right: Yodlee is a bit too invasive for my taste. That would just add to the stress of managing cards. I have enough trouble managing multiple high-interest MMAs.

Kitty, you’re bang on with your points, and you rather well reinforce my point: anecdotal evidence is *not* convincing. I only threw down my anecdote in response to yours and Richard’s anecdotes. Take the same logic you applied to my anecdote, apply it to your own anecdote, and see what I mean. Regarding your questions about transportation: bikes and trains everywhere. Only go to a store when I need to, and I do agree that for stores that are distant from home, my modes of transportation enforce needs over wants.

golbguru, et. al., I don’t wish to speak for Corndogger (although I am aligned w/ her/his views), but I take “cash basis” to mean currency, checking accounts, savings accounts, maybe some time deposits. Cash does not include loans or debt of any sort, even if drawn in the form of currency. I even shun a brokerage account when I am forced to operate it as a margin account. In accounting terms, cash basis would mean CCE (Cash and Cash Equivalents). (I’m not an accountant, just learn what I need to for self-directed investing.)
RichardJun 13th, 2007 at 5:45 pm

Steve, to just briefly respond… I wholeheartedly get that you see the time cost of arbitrage simply too much for you to be bothered by it. Keep in mind though, that some see that time spent as an investment, not any different from hours put in at any job in return for compensation.

Personally, aside from researching the card offers (which are well-documented on many PF blogs), setting up automatic transfers, and I suppose remembering when the 0% period ends, I don’t see a large time investment here (but of course, that’s just me).
kittyJun 13th, 2007 at 7:22 pm

Corndogdriver, when you owe money at 0% while your money are earning 6% you may be in debt technically, but as long as you have the money to repay it before the interest goes up, you are still going to end up ahead financially. This is elementary school math. As far as still having one last bill - you always have bills: telephone, utilities, taxes, repairs. So essentially, if I use your definition of debt, you are also in debt - you owe money to telephone company, to electric company, to government. I am not even talking about medical bills in case of a serious illness.

For those of us who pay in full credit card bill is just another bill, no different from any other. As long as you haven’t spent more than you can afford, paying for your purchases shouldn’t be a problem.

As far as those of us who pay in full every month being “the rarest of birds”, I would think that 42% of Americans are a bit too many to be considered “rare”. Unless it is my English and I don’t understand the meaning of the word… Also keep in mind that among 58% who carry balances there are people who use 0% offers for arbitrage, and you’ll have almost half of Americans who use credit cards without any negative effects.

How many do you think of those 58% who carry balances read financial blogs? I’d bet very few. So essentially, you are arguing here with people the majority of whom do manage to pay their bills in full, and some of whom probably managed to save more money than you have. Do you seriously think all of the rich people never use credit cards?

Steve, you are right, anecdotal evidence is not convincing. But unless someone specifically studies spending habits only of those who pay their bills in full - and doing such a study would be very difficult because of all possible confounding factors - you cannot be sure that we spend more with credit cards. Averages include people who carry balances and as I said before, one person who spends a lot more than he or she can afford would significantly affect this average. We can only go based on what we know about ourselves - how we make decision on what to buy, what our bill looks like. And I really think everyone is different.
Steve AustinJun 14th, 2007 at 1:47 am

Richard, I considered card arbitrage several years ago (before the all-cash experiment) but ultimately decided that it’s not a time investment that scales. I could be wrong, but I understood the arrangement to be that you still have to have credit lines extended in your name, and there is a limit to that (usually based upon earned income?). At some point you reach the sum of your credit line limits and you can no longer earn any more in card arbitrage each month (subject to fluctuations due to different cards and card offers). If you cease card arbitrage and instead spend that time researching an out-of-favor, high-dividend stock investment each month, that time investment, if you transact on it (assumes portfolio diversity, etc.), will compound your net worth faster than your fixed card arbitrage time investment will. Maybe you’ll run your card arbitrage for a while, until your savings accumulate and you realize that time spent investing that savings will yield much higher returns than continuing the card games.

Kitty, check out corndogdriver’s 8th June post for some studies he cited. I didn’t follow them up because I’m already convinced. Perhaps you know of some studies that will instead convince me that, in general, pay-in-full card users spend no more (and perhaps even less?) than cash users, even accounting for the value of incentives? You can still argue that you’re an exception to any studies on this kind of behavioral science, but then there are always statistical outliers in any sample population. What’s important is whether the odds of saving more are better under the cash-only or card-only (pay in full) approaches, not whether you personally can beat those odds.
SteveJun 14th, 2007 at 6:27 am

Steve, the studies corndogdriver cited apply to everyone and deal with averages - look at my first post to see the problem with these studies. They don’t specifically look ONLY at people who pay their balances in full.

The major flaw in the studies mentioned by corndogdriver is that they looks at everyone, including people who significantly overspend. As I said, take one person who spends 100% more with credit cards and 4 people who spend the same as they would with cash and you’ll be able to say “people spend 20% more on average”. If you consider that all these people who carry balances overspend by way more than 18-20%, the obvious conclusion would be that 42% who pay in full don’t. Given that people who carry balances are in the majority, if everyone were to spend more with cards, the average would have been much higher than 18-20% corndogdriver mentioned.
KIttyJun 14th, 2007 at 6:28 am

Oops, the last post was by me…. I made a mistake. Sorry Steve.
RichardJun 14th, 2007 at 8:22 am

Steve, I don’t know how true what you say is (the bit about the sum of your credit lines relative to your income). I would imagine, however, that the reason low-income earners are able to get so much into debt, however, are because this does not in fact apply. Even if there was a limit, it is probably high enough so that you can make some decent money off of it anyway.

I’m a strong advocate of high-dividend stock investments. In fact, I own shares of several. Before buying each one, however, I researched it VERY carefully, from historical performance, to analyst reports, to fundamentals, even to a degree, the technicals. I’m also very happy to say that my 2 most recent additions to my portfolio are up 40% of the last 3 months. Yet all the while, I’ve also been looking into credit card arbitrage (haven’t pulled the trigger yet since my score is down due to recent auto loan inquiries). AND I work full-time. All this to say that it doesn’t have to be one or the other.

Another thing too Steve, if done right, arbitrage is 100% risk free. You read your terms, you set up automatic payment, maybe a reminder here or there to tell you when you need to pay it all off by… end of the year, easy 5-10K (more or less). For some people, that’s 10% of their current salary. For some it’s 50%! Either way, it’s nothing to scoff at (not for me anyway).

What stock can you say is 100% risk-free? Sure, you can LIMIT your risk by doing your homework before you buy, or even buying options instead. But can you tell me with 100% certainty that stock X WILL NOT FAIL? And WILL guarantee a return?
CorndogdriverJun 14th, 2007 at 9:09 am

And to beat the dead horse one more time: if you find someone who has all the above mentioned types of debt - personal loans, HELOCs, overdraft LOCs, payday loans - you will ALSO find credit card debt. Without a doubt. When I say “spend cash”, I’m talking about a lifestyle of not borrowing money - ever. Credit cards are just the least painful way to go in debt.

It’s true the cc companies may just be fishing when they send “payers in full” new credit cards/apps. It’s more likely however, that they ARE making money off of you - just a bit less than they make off the non “payers in full”. If they weren’t making money off the half of their customers who are payers in full, they’d have a hard time just keeping up with their bulk-mailing expenses and legalized spying software suites.
RichardJun 14th, 2007 at 9:13 am

Corndog, HOW does a credit card make money at MY expense if I pay in full EVERY month?
Steve AustinJun 14th, 2007 at 9:34 am

So those studies don’t say something specifically about pay-in-full card users, and therefore they don’t definitively apply to your situation. The same can be said about any study w.r.t. what it means definitively to an individual.

When dealing with data, for which means and standard deviations are derived, one can draw probabilistic conclusions. So, what is the probability that any given member of the sample population (in the studies cited by corndogger), to include both payers-in-full and balance-carriers spends less / saves more than someone from the cash-payer sample population? Without running Chi-square tests for fitness of your situation against the full body of data, we won’t have this probability quantified, but comparatively, I feel comfortable saying that that probability is lower than the converse (that any given member of the cash-payer sample population spends less / saves more than someone from the card-payer population).

Just saying that the deck is not stacked in your favor as a card-payer. No matter how disciplined you are, you’re fighting an uphill battle against the “system”. I can, however, accept that *you* are exceptional in this regard.
Steve AustinJun 14th, 2007 at 9:48 am

Richard, I think the card companies make money off of you systemically, i.e. based upon your transactions. Everyone thinks she/he is an exception, and perhaps you really are, but I’m with corndogger that it makes no sense for a for-profit organization to continue unprofitable practices for very long. And perhaps you are right (in a prior comment) that this is indeed happening, as fewer and fewer low-interest balance transfer offers are extended.

Regarding the one or the other comment, you almost have me convinced to look at card arbitrage again. If only I could do it without wrecking my carefully arranged no-credit lifestyle. Maybe I’ll see if I can start an LLC and do card arbitrage as a side business, i.e. without my personal SSN involved? Ideas?

Also agree that you can do both, if you really do think that your card arbitrage time cannot be better diverted to further researching undervalued and/or high-div stocks. Agreed that no single stock (especially) nor even a well-diversified handful of stocks is risk-free. I also don’t think card arbitrage is risk-free: you could make a mistake. If you agree that there is some limit to how much an individual can arbitrage on cards each year, do you see that even accounting for the rare but inevitable bad stock pick your compounded mean ROI across all such stocks will eventually far surpass what you are doing on a relatively fixed basis each year with card arb?

Surprised golbguru hasn’t cut us off yet. We’ve (notably I’ve) been yapping for a couple of days now. Need to get back to stock research….
kittyJun 14th, 2007 at 4:06 pm

“When dealing with data, for which means and standard deviations are derived, one can draw probabilistic conclusions.”

I believe - and I admit I’ve forgotten much of my senior-level probability and statistics courses - that in order to determine deviation, we need to know how this “extra amount spent” is distributed among population. But since neither of us read the study, we cannot really make any conclusions about the data. All we heard was the average, and given how one high amount of debt of only a few people can affect this average, there is not much we can deduce from it.

“So, what is the probability that any given member of the sample population (in the studies cited by corndogger), to include both payers-in-full and balance-carriers spends less / saves more than someone from the cash-payer sample population?”

Obviously, given that over half of all Americans carry credit card debt and, therefore, obviously spend more than they would have otherwise, if you take a person in random you are more likely to select the person that carries CC debt and, consequently more likely to pick the one who spends more. We could’ve come up with this conclusion without knowing anything about the average. If you fill out a basket with 42 black balls and 58 white balls you are slightly more likely to select a white ball. So this experiment wouldn’t really show anything about payers-in-full except for that there are fewer of us.

If we go back to black and white balls and are told that these balls are of different weight, and that the average weight is 20% above X, we cannot say anything about how likely we are to select a ball that weights even 1% above X unless we have more information about how this extra weight is distributed, right?

Unless we read the details of the study including the data, we cannot rely on its conclusions. Look at epidemiological studies. With the exception of well-conducted RCTs, many studies turn out to be flawed and the conclusions are often proven incorrect. Ever heard of HRT?

For example, how big was their cash-paying group? Did they look at how many people spent more or did they simply look at the amount of money spent? Since most of us don’t bother with credit cards for small purchases and, as it was already pointed out, many stores only take cash for purchases below certain amount, the latter would be pretty inconclusive. Did they adjust for income? Was the study based on some questionnaires sent to random people? The latter studies are notoriously inaccurate.

What we know already are a) people who carry balances spend more than they would’ve otherwise - this is obvious because they spend more than they have b) some people (we don’t know what percentage) spend considerably more - to the tune of 100% more c) there are more people who carry balances than who don’t.

Assuming 20% extra money spent with credit cards number is correct, it would be enough for balance-carriers to spend slightly under 40% more with credit cards than with cash on the average for the payers-in-full to spend 0% more. I think 40% average overspending for balance-carriers is a reasonable possibility; therefore, it is perfectly possible that payers in full don’t spend a penny more.
CorndogdriverJun 14th, 2007 at 4:52 pm

We now have people challenging the statistical methodology of studies they haven’t read and won’t read, so married are they to the laughable idea that they’re really puttin’ it to CitiBank.

I’ll bow out at this point and we’ll all agree to disagree. But my challenge stands: do a budget. Decide how much you’re going to spend on each category. Put that much cash in an envelope and spend out of that envelope only for purchases in that category - no intermixing. When the groceries envelope is empty - no more groceries; when the entertainment envelope is empty - no more movies. When you visit that emotional place for a couple of months solid with no cheating, you’ll have the data to stick with it or return to your old system. Money is almost never about math - it’s about emotions, relationships, dreams, habits, and your spirit. The math just can’t make that leap off the yellow pad and into your wallet as cleanly as it seems it should.

When I used credit cards with rewards, I thought I was being smart - paying in full, getting a break on my car insurance and cell phone, getting airline miles, all the rest of it. I other words, I was ya’ll.

When I transitioned to all cash 6 years ago, I thought as you all did - it’ll make no difference. It made all the difference in the world. There’s no getting around it. When you plunk down greenbacks, it is a different emotional experience than throwing down a card. Which I suspect is why I often hear people state they prefer cards. “I don’t like spending my money” (meaning cash). I have heard it all-too-many times.

The all-cash life, that emotional experience, visited often enough, will change your habits and give you a power you didn’t even know you were lacking. A power that so fully dwarfs Discover points it makes me shake my head that I couldn’t see it sooner. But that’s the advertising soaked culture we live in and nothing is as skillfully and relentlessly marketed as debt.

Best to you all.
KittyJun 14th, 2007 at 6:33 pm

If you were to provide a link to a study that is good enough to be accepted for publication to any reputable peer reviewed journal (they have these on economics, right?), I’d read it. The only study you mentioned was about MIT students using money spent by college students at sporting event - given their youth and very limited access to cash this is hardly a representative population. I’d bet the percentage of people who do not pay in full would be higher among students too. Your other information was McDonald sales data and PBS expose. None of this would qualify as a serious study.

As far as your challenge goes - I am perfectly happy with my financial situation, both income how much I save each month and how much I saved so far. I just looked at my credit card bill out of curiosity and there is not a single purchase there I regret. I also don’t go to McDonald - I like my size 5 dresses - or eat out, so I certainly am not part of their statistics.
Steve AustinJun 14th, 2007 at 7:52 pm

Kitty, so it seems we agree that nothing definitive for your exceptional case can be concluded from studies without running our own statistics on the data. If we’re not happy with data that don’t seem to apply to us, what else can we do but generate our own data?

You’ve got at least two folks here who were diligent (perhaps even as disciplined as you, though I doubt it) card-payers-in-full, and who now operate as cash-payers. I’ve been using Quicken since 1994 to record every single cent income or outgo so this is a fact for me: life is simpler and richer without credit lines of any kind. Corndogger has a similar story. Unconvincing anecdotes from only a couple of people, yes. But you can consider those anecdotes two data points.

The other anecdotes here come from folks who are faithful card-payers-in-full, card-users who claim iron discipline (and whom we have no reason to doubt) yet have no (or don’t state any) personal experience with operating as all-cash-users.

The anecdotes that I have yet to hear would go something like this: “I was a card-user for a while, tried the cash-user lifestyle, found no difference to my disciplined bottom line, but I went back to the card-user lifestyle for the miles and other card incentives.” Or, “I was an all-cash-user until I heard about card incentives — I learned all about cards and rewards and have never looked back.” Where are the former cash-users here who have through personal experience proved to themselves that card-using is no less disciplined than cash-using?

I think ya gotta try it both ways to know for sure which would make you happier. Wouldn’t you like to try it both ways so that you can contribute your own data point to our sample population?
Steve AustinJun 14th, 2007 at 8:02 pm

A peripheral thought: seems this long string of posts has been distilled into two threads. 1) of all-card and all-cash approaches, which is most conducive to disciplined budgeting; and 2) is card arbitrage (expense budgeting aside) worth the time and financial risk, however slight?

Still noodling on Richard’s earlier comments. Question: could an individual effectively and diligently operate her/his expense budget on an all-cash basis while maintaining a number of credit cards that will only ever be used for card arbitrage, i.e. 0% (or very low %) balance transfers to high-interest money market accounts?
RichardJun 14th, 2007 at 8:08 pm

Steve, I’m not saying that arbitrage should be used INSTEAD of a well-researched stock portfolio — I’m saying they can go hand in hand. And I’m also saying that arbitrage itself, IF DONE CORRECTLY, is risk-free, unlike stocks.

To both you and Corndogdiver, both all-cash users — are you saying that if you were NOW to convert to credit cards once again, after living on cash alone for so long, that your spending habits would suddenly change for the worse, just because the means by which you pay has changed?

@Steve about the last arbitrage issue you just mentioned: in your scenario, I don’t see why not. It can be something on the side to bring in some extra income. Again, like everything credit-related, it requires some DISCIPLINE however. So, if you’re tempted to take that $50,000 that you just got from a balance transfer (BT) and put it towards a new Porsche, this perhaps is NOT for you. If you can read the terms carefully, however, can set up a high-yield account (5-6% or more) that can preferably handly automatic transfers each month to pay the bill, and you DON’T TOUCH THE PRINCIPAL, then I can’t see how this won’t be a WIN situation for you.
RichardJun 14th, 2007 at 8:17 pm

Kitty’s made some good points as well. I particularly liked the one where she noted that the 58% that DON’T pay in full every month also include those who:

1) Are using the balance for arbitrage; and
2) Those otherwise carrying balances on a 0% interest card.

Yet people have consistently used that statistic to PROVE that the majority of people are in debt and are irresponsible since they CAN’T pay it off. When in fact, many CAN, but simply WON’T, since it’s beneficial to them. Now, show me a statistic on THOSE people, and THEN let’s talk.

Btw Kitty… size 5? I don’t suppose you live in AZ…
RichardJun 14th, 2007 at 9:49 pm

Just came across this and thought I’d add it to the mix:http://www.thesunsfinancialdiary.com/articles/credit-score-and-insurance-rate/

Talks about how your credit score and insurance rate are intertwined.

Now, I’ve seen posts elsewhere (http://www.dinksfinance.com/2007/06/just-say-no-to-credit-cards.html) that suggest that one’s utility bills directly contribute to one’s credit score… anyone know how true that is?
golbguruJun 14th, 2007 at 11:00 pm

Richard, that depends. Usually positive history is not reported by service companies ..in sense if you are making your payments regularly to your utilities company, it’s not going to appear on your credit report as a “favorable” thing. However, if you miss a payment, it is likely that they report that mishap on the credit score - that too usually appears when it goes for collection - usual practice is to carry over the balance to the next bill with some fine, without any record on credit report. Different companies will have different policies in this respect.

Now, James from Dinks Finance is a friend, but I disagree with his statement:

“In terms of building your credit, its true that responsible use of a card can improve your FICO score. But for that matter, so can paying your power or phone bill. “

Paying your bills on time does not improve credit score - it’s just preventing it from heading downwards.

However, this (from the same paragraph as the above quote) is correct:

“The notion that you need a credit card [to improve credit score] is nonsense. “

There are numerous ways of getting your credit score up.
Steve AustinJun 15th, 2007 at 4:19 am

I’ve enjoyed this discussion, but am struggling to reply succinctly, in order to bring it to a close eventually.

Richard, neither stock picking nor card arbitrage is risk-free — one could err, operationally, with either. Have to admit that stock picking has additional risk that card arbitrage does not, but also have to re-iterate that card arbitrage has an opportunity cost that stock picking does
not, and I think the latter cost outweighs the former risk. (Seems like this is a tangential thread, so maybe just end it here.)

Regarding the main thread, I believe that if I converted back to an all-card (use credit for everything, but never miss a payment) my savings rate would go down, even factoring in cash back card incentives. That belief is founded on the fact that I’ve been there before.* Because mortgages are easy to get, I’d buy more house than I need. Because of card incentives, I’d spend more on everyday “needs” than I truly need. Because of the grace period on a credit card, I’d be less inclined to resist good “deals” on items that I need (wouldn’t have to hand over my money immediately).

Seems you believe that if you eschew all credit and convert to an all-cash budget that your savings rate would go down. But where is the personal experience to ground that belief?

Seems we’ll not get much further in discussion, as the “sides” won’t run real experiments to test out each other’s claims. (Doubt anyone could get me to buy a house instead of renting one this year, likewise doubt anyone could get a credit-user to experimentally sell a house and rent one on a whim.)

*wanted to disclose that in my former credit life, I never sought out the best cash back card(s), but I did have one that gave something like 0.5 or 1%, depending on the purchase, or the vendor
golbguruJun 15th, 2007 at 4:52 am

Richard, Steve, Corndogdriver, Kitty (both):
Thanks for the extended discussion - it’s good to know what people on the other side of the table think about certain things.

Steve, on the experiment side, I have held back some key facts about my card usage, which I earlier thought would bias the discussion one way or other. But now it’s ok. –> Except the last 5 years of my life, I have used only cash - and lived in a cash only economy. My parents had their first credit cards when they were around 48 yrs old.. till then it was all cash. Now, some of their expenses are in cash (in places where cash gets them a discount) and some are with credit cards (where the cards get them discount). Enough said on this.
Steve AustinJun 15th, 2007 at 7:26 am

golbguru, you left out the critical data! Could you comment whether you and/or your parents’ savings rates (net savings / post-tax earnings) are higher or lower now that you have left behind the all-cash approach?
JamesJun 15th, 2007 at 7:43 am

Okay, I’ll lay out what I’ve got against credit cards.

1) Industry sleaze: Some practices, such as excessive fees, universal default, lack of transparency, etc., are ubiquitious in the industry. I think these practices are intentially designed to fleece consumers.

2) Psychology: Use of plastic enourages people to spend more, use of credit cards encourages people to spend more than they have.

3) Perks that aren’t: A lot of these rebate programs are, in my view, calculated business decisions which result in increased use of cards and greater opportunities to harvest fee income. Most people carry a balance (about 60% of cardholders), I also believe that those who don’t carry a balance actually may slip up and subject themselves to fees. Plus, its not clear to me that

4) High rates of interest. Get this, the maximum interest rates cards can charge is 29%, but this ignores the fact that high fees can substantially add to the bottom line.

5) Nearly all credible financial advisors will tell you to retire your credit card debt. Since its hard to get concensus on these types of things, this agreement speaks volumes about the proper role of credit cards in personal finance.

I’m against government regulation, but at the most recent congressional hearings, the major credit lenders had to agree to discontinue use of some business practices (e.g. universal default) to avoid regulation. This suggests to me there are real problems with the credit card industry.

Why would you want to get involved in that scene? — Just get a debit card and pay as you go. Its a no brainer.

Best,

James
golbguruJun 15th, 2007 at 8:15 am

Steve, I left that out on purpose to avoid going all over it again. The cards didn’t make a difference into how they were spending or saving. Personally, I am more comfortable with cards. Especially, since I have discovered the 0% APR arbitrage and the power of compounding that money.

James, I have no doubt that credit card “debt” will hurt with higher interest and fees etc., but you don’t need to get into “debt” to use credit cards - just pay them off every month. As for the sleaze, psychology, and perks that aren’t - now, isn’t most marketing based on those concepts.
RichardJun 15th, 2007 at 8:46 am

I love how James consistently ignores the BENEFITS of using credit cards, and simply views them as instruments of debt, rather than just another means of payment. As golbguru said, you don’t HAVE to get into debt using credit cards.

Steve, thanks for your opinion on the matter… however, I still just don’t see how for you — or any all-cash person — that would be the case. Right now, I assume you live on some kind of budget. You either have the money to buy something, or you don’t. And you’ve trained yourself that way. I don’t see how all of a sudden you’ll change that lifestyle to buy something when you WOULDN’T have normally bought it before, just because you’ve changed your method of payment. I don’t see how you’ll suddenly spend more JUST BECAUSE there are incentives now. I do NOT see how you’ll up and BUY a house, instead of renting, JUST BECAUSE you can get a mortgage easily.

If you WERE to get a credit card, why can’t you just view the credit card as plastic cash, and leave your spending habits unchanged? This is the part I don’t get. But I suppose you may be right in that perhaps I’ll never know, until I go all-cash, and then re-convert to all-credit.
JamesJun 15th, 2007 at 8:56 am

Richard,

Thanks for commenting.

There are NO benifits found in using credit cards that a pay-as-you-go system can’t give you. Debit cards have perks as well, for 0 interest and 0 fees.

Best,

James
RichardJun 15th, 2007 at 9:06 am

James, I’d really like you to show me the ABSOLUTE BEST debit card reward program there is out there, and show me that it can beat the best credit card reward programs (some of which give you up to 10% on certain purchases, if only for a limited time).

And it’s as though you’re not getting this part: *you can pay as you go with credit cards!!!!!!!* James, if EVERY time you made a credit card purchase, you logged on to your bank’s website and transferred that exact amount from your savings/checking to your credit card, IS THAT NOT THE SAME THING? Granted it takes an additional step, but ignore that for a moment. Tell me PLEASE, because I MUST be missing something here. Where is the interest coming from? Where are the fees coming from???
kittyJun 15th, 2007 at 7:21 pm

“Btw Kitty… size 5? I don’t suppose you live in AZ… ”
Nope. I live in NY. Westchester county to be precise. That’s a pity. I am afraid I might be too old though, already in my 40s.

James I am not saying that if I were to convert to cash I’d spend significantly more. Yes if I take a large amount from the ATM I tend to spend it. Simply because it is not earning interest anymore and I look at it as “spending money”. But in general, I suspect I’d spend about the same. Cash does seem to burn my pockets in some situations like travel, but in most cases it’s just another way to pay.

My parents by the way also started using credit cards late in life. They were already in their 40s when we came to the US. Before that it was cash-only - I grew up in Russia, by the way. They even got their salaries in cash and had to go stand in line every month to pay electric and other bills in cash. Not much savings there, but it was a different environment. My grandfather had some money saved and kept it hidden in the apartment since nobody trusted the banks. But with government’s history of “reforms” that robbed people of their savings, people spent what they earned. During first couple of years in the US we didn’t have credit history so we couldn’t get credit cards. When someone explained to my mother what it was they said something like “you go to a store and you give a card but don’t pay”. So my mother asked “but then you get a big bill, and have to pay it all at once?”. When someone mentioned minimum payment, my mother immediately asked about the interest and who in the right mind would pay it. They liked the convenience of cards, but the idea of not paying in full never crossed their minds.

I didn’t notice any change in my parents’ spending habits after they got the cards. They still lived pretty modestly. Much more modestly than I did, but then my starting salary was higher than theirs combined. I got my first card a couple of month after grad school. I didn’t go on a shopping spree. It was convenient not to have to carry cash around but that was about it.

There are things I pay for in cash. The hair salon I go to doesn’t take credit cards, for example, but as this place is pretty good and cheaper than many other places, I use it. It doesn’t “hurt” me to sign a check to my hairdresser any more than it would be to pay by card. If I travel and I see a nice restaurant full of locals that is reasonably priced I don’t care if it doesn’t take credit cards. Usually it is the other way around - if a place has credit cards signs I suspect it may cost more.

One thing that I don’t understand is why people think that one is bound to spend less with debit card than with credit card and automatic payment in full. In both cases the money are taken directly from the account, it may be taken later with a credit card, but you still have to make sure you have the money. So what is the difference? You don’t have to pay immediately for the telephone or electric bill. Does it make you keep your A/C at 68 all summer or spend hours calling to all exotic places?

One advantage of credit cards that I believe hasn’t been brought up is fraud protection. Debit cards have it to some degree, but the protection is much stronger with credit cards. Also, while the charge is investigated the money are gone from the checking. Not so with credit cards. Given large enough amount of such a charge and bad timing and this little difference could be pretty unpleasant.
SamJun 20th, 2007 at 9:14 am

My 2 cents. I was always one of those folks who used their credit card on a regular basis, paid off the monthly bill in full and rejoiced in cash back and free airline tickets. Then about 7 mos. ago my new husband and I added up our debt and found that we were $55,000 in debt (more than half of that was grad school debt) and we realized we needed to change our ways if we wanted to accomplish certain financial goals. So we stopped using credit and now use only debit (which we like better than cash b/c its easier to track in Quicken) or cash. Instead of spending $2000-$3000 a month on my credit card I now spend about $1000 a month on my debit card. Certainly some of my spending habits are different b/c I’m more mindful about our budget and debt repayment. I’ve also found that using debit instead of credit reduces my spending b/c I have to stop and think about each item or service I purchase before I swipe that debit card. Just being more mindful and spending money I have has dramatically reduced my spending. Now that I’ve gotten into this habit of being mindful I could probably use credit and limit my spending each month but I don’t think I will. Somehow spending money in my account means more to me than spenidng money that I have to pay back.
moomJul 3rd, 2007 at 9:16 am

I find it much easier to spend cash than use a credit card and I always have plenty of cash with me
kittyJul 4th, 2007 at 2:31 pm

Can’t believe this thread is still going on…

Sam, if you have always paid your bill in full how could you end up with 55K debt? Did you spend 55K in one month? It just doesn’t make sense. If you have 55K balance it means you have either not paid at least some of your bills in full or you spent 55K in one month.

Do you know what paying your bill in full means? It means that if you spent $500 a month you send a check for $500. If you spent more, you send a check for more. So pray enlighten us how could you have always paid your full monthly balance and yet ended up with 55K in debt?
MarkJul 7th, 2007 at 7:54 pm

>

The fallacy in this is that it implies accepting cash is cost free. Cash tends to “disappear” either through employee theft, mistakes, or armed robbery. Having armored car pickups costs money and is based upon the amount of cash picked up. Cash takes time to count and re-count which takes labor and is an expense. Balancing a whole days credit receipts is faster than counting out one cash drawer. Etc, etc.
MarkJul 7th, 2007 at 7:59 pm

Forgot to put that my comment above was in response to an earlier comment that said we all pay 2-3% more to make up for what the merchants pay in card processing.
FrancisJul 15th, 2007 at 6:06 pm

I think credit cards are bad, the more money available the more we spend…you all have too much free time.ciao.
Suzanne McguireJul 17th, 2007 at 2:48 am

I too agree with Francis about people spending more with credit cards. But credit cards have definitely made big purchases like buying a car or vehicle easy. With financial organizations offering so many user-friendly offers, availing such loans as car loan or auto loan have become very easy.
The Finance Network BlogSep 6th, 2007 at 4:43 pm

Actually, credit cards have been declining the the national debt amount by 3%/year for the last 10 years. This is mainly due to students becoming more aware of fees and costs due to using credit cards
Credit, Finance, Forex, Politics and more...Sep 11th, 2007 at 9:31 am

Credit cards are however the main cause of debt in the United States, Canada & Europe when it comes to personal spending habits. This does not include mortgages, or car and bank loans.
CameronSep 25th, 2007 at 8:24 pm

Kitty: “You don’t have to pay immediately for the telephone or electric bill. Does it make you keep your A/C at 68 all summer or spend hours calling to all exotic places?”

Beautiful. I believe this succinctly and completely counters the “you spend more with a credit card” argument. People live responsibly with other end-of-month-bills (electric, phone, pay-per-view), credit cards are no different Great analogy, Kitty.

By the way, I enjoyed the whole conversation. Just finished reading and thought maybe I should do something better with my time - but then again I do find it all entertaining. Thanks for participating.
jubethoneNov 9th, 2007 at 12:56 pm

I know this is a little bit late, but I just wanted to add my 2 cents. First of all, I have a budget. A very extensive budget that allocates money to such catgories as gardening supplies (including potting soil and pots for indoor plants), clothing for work, casual clothing, donations, gas, postage, etc.

I use credit cards unless some place is cash only. I have never gone over my budget for the year. I usually put enough in my “monthly” budget to pad for the months that I spend more in certain categories (like my water bill only coming once every 3 months). I also get the cash back rewards on things I would have been spending money on anyways. For example, I have the Get More Discover card. Every 3 months, the 5% cash back categories change. I just use my discover card on the categories that I get more cash back on which I would have already been spending money on anyways. Then, I use them to exchange for more than the balance of cash back for gift cards to places that I had already budgeted to spend money on in my budget.

I also pay my credit card bill in full every month. I use mint.com to keep track of my spending and my spending categories so I can see where a majority of my money is going.

Please tell me why credit cards are harmful to someone in my situation. I recognize that not everyone can be as disciplined (read OCD) as me, but this is why I feel annoyed when people make such blanket statements as “credit cards are horrible” and “all credit card users are idiots.”
James SNov 14th, 2007 at 7:50 am

I’m also late (first time reading this blog - I like it!), but had one quick comment that I’m surprised nobody brought up yet.

Credit card companies keep sending credit card offers to “Pay In Full” consumers because they still make money off of them. Not through late fees or interest (I’ve never paid $.01 in that), however they charge a fee for processing the transaction. From what I’ve picked up it is something on the order of $.10 + 1-2% per transaction. So, if you spend $1,000 a month over 20 transactions, the CC Company gets something like $10-$20 in processing fees. So, the credit card company can give the cardholder 2% in rebates and still break even!

So to summarize:
Vendors pay a small fee per transaction for the convenience of customers to use credit cards.

Credit card companies want as many people to use credit cards because they make money off of the transactions

Consumers (who pay in full) get rebates from the credit card companies for using their credit card.

In general, this is a WIN-WIN-WIN (for a certain subset of people that have self-control and pay in full).

WIN - Stores get more traffic. Some people spend more.
WIN - Credit cards make money off of the transaction fees. They also make money off of those that don’t pay in full.
WIN - Consumers get rebates from the CC Company, plus other side benefits of using a CC.

LOSE - Consumers who don’t pay in full pay a LOT extra for their purchases.
TIE - Consumers: In the case that stores raise their prices to cover their additional expenses, consumers pay more for their items. For the Pay In Full this gets rebated back to them, for everyone else they have to pay this but don’t get the money back.
aldrinNov 20th, 2007 at 11:25 pm

It’s true we are spending more in using credit card.It is because all we buy are postpaid that is use now pay later.Just like cellphone we are spending more air time when it is postpaid than prepaid.
Logan Flatt, CFANov 28th, 2007 at 9:17 pm

I strongly encourage everyone here who wants to get ahead and actually build wealth for themselves to think more “outside the box” than what is discussed in the numerous comments above. Talking about credit cards and credit scores only plays into the hands of the financial services industry and the game they have set up for us here in America. To truly get you and your family ahead financially, focus on a new metric of “debt success”…

Change the Game: Replace Your Credit Score with Your PowerWealth Debit Score™
http://www.powerwealth.com/powerwealth/2007/07/change-the-game.html

In short, focus on your Debit Score instead of your Credit Score!

Logan.
yorkieDec 14th, 2007 at 3:56 am

I’ll admit that when I was young and dumb I used credit cards a lot. I learned my lesson. I, like most people bought stuff they could never afford thinking they would just pay it off in monthly payments.
Do this a few times and you’ve got yourself knee deep in debt.
That being said I really believe that credit cards are a nessecity and I use them all the time. You have to be very responsible when use them and Paying Them OFF every month.
I think that I need to have them and if you travel a lot you will probably agree. They just make life much easier, but like I said with spending power comes a lot of responsibility
Ames TiedemanJan 6th, 2008 at 8:07 pm

Credit cards can be an important tool. Most use them wisely.
Hilary BowmanJan 23rd, 2008 at 7:04 am

Well, I’ve been in the finance industry and as I always adivse my customers in my website http://www.fastguaranteedloans.com credit cards are bad, very bad for people with UNMANAGEABLE SPENDING.

If you know your monthly budget limits it is ok to use them. Besides they always provide cash rewards and even can save you in situations like when you realize that those pair of shoes are easy to get in payments
ktsmiley98Jan 24th, 2008 at 6:45 pm

I had a lot of foolish credit card debt at that 19-22 year old stage. You know the one: I’m depressed, life sux, I’m gonna go to the mall to make myself feel better. But after taking a cash advance from my Discover to pay my Discover bill, I decided then and there that I had to do something about it. I have been “Credit card sober” for 5 years now, and even have excellent credit now. It sounds cliche, but I blame my parents. When I was younger, 3rd of 4 children, money was extremely tight. They left us totally in the dark about how money works. My parents were so embarrased about their bleak monetary situation, they wouldn’t even talk to us about money at all. I didn’t learn about saving money for your bills later on in the month until they were past due. If anything, I believe that what it learned from your parents far outweighs what you are taught in school. I too was taught to balance a checkbook in 7th and 8th grade, but that’s about as far as “Junior Achievement” goes. teach kids to do a monthly budget successfully, then you’re getting somewhere.
Jerry JohnsonFeb 26th, 2008 at 4:18 pm

Mega kudos on an awesomely informative blog!

This blog definitely enriches the internet.

Keep up the good work!

Jerry Johnson
RobMar 5th, 2008 at 12:39 pm

Credit card companies love the fees. That’s is why they have such beautiful corporate headquarters. They are next in the credit collapse. People that can’t pay their mortgage won’t be able to pay the credit card payment either.

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