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A Credit Card is Not a Free 30 Day Loan
I exchanged some emails and comments with a reader after my previous post on credit card usage . It was a good discussion and I wanted to share with you some of his concerns and clarify how and why I currently use credit cards.
He pointed out valid concerns
He rightly pointed out that using a credit is actually taking a short-term loan. And as with any loan, you are incurring risk by doing this. Also, using a credit card is not free. You are not really taking a free 30 day loan and getting ahead by receiving some cash back. As I pointed out in my previous post, people tend to spend more money when using a credit card compared to using cash. But even if you are very careful and conscientious about it and do not overspend, there is still a cost involved. Credit card companies charge a service fee to the merchant you are paying. And the stores then pass this cost on to you in the form of higher prices.
So why do I use a credit card?
The overriding reason that we use credit cards in my family is convenience. In the past, I spent time thinking I was smart by taking out the "free loan" and stocking up the cash back – but I’ve moved away from that line of thinking because it is a risk you are taking that is not worth that marginal benefit.
I do, however, feel that my credit card provides convenience to me and I mentioned the reasons why in the previous post. So, does it cost more? Yes, it does but I feel that the small extra cost is worth it. All conveniences cost money and I view a credit card the same way.
All conveniences cost money
So many things in life are conveniences and not strictly necessary – and that’s fine with most people. I own two cars and they are very expensive to own and maintain (well, just maintain because I already paid for them). Do I really need them? No, probably not (though I do live in the suburbs). I could probably figure out a way to get around without them (or without one). Thus, they are a convenience and though they are expensive, they are worth it to me due to the value I get from that convenience. Maybe a car is a bad example but what about eating out at a restaurant or having air conditioning or an electric (or gas) stove – they’re all technically conveniences.
So, is it worth it to pay 3% (or so) more on goods when I use a credit card? Yes, for some things I’d say it is. I’d pay 3% more so I can get my gas quicker right at the pump. I’d pay 3% more to not have to carry hundreds of dollars in cash to the grocery store.
My rules for using a credit card
Here are my rules for using a credit card (I’m sure you’ve heard these many times):
- Understand that credit cards introduce risk and extra cost
- Do not carry a balance – if you do, stop using your cards and pay it off
- Do not use the card for short-term loans – if you do not have the money to buy something then do not buy it (in other words, only buy something you already have the money to pay off)
So what’s the point?
I do use a credit card but I want to make it clear that I am NOT advocating that everyone should use one . If you have trouble controlling your spending or think the convenience is not worth the risk or just don’t want to use one, then don’t. And if you tend to trust someone like Dave Ramsey more than little old me, then you will cut up your cards and throw them away immediately.
I have made the conscious decision to use a credit card. That being said, I am slowly moving us towards more of a cash-based system to see what advantages that presents. If you use a card as well, please consider all of the ramifications of its use. Ensure that you are not being deceived into thinking you "need" one or you will make boat-loads of money via the rewards. Again, we use a card for convenience and I am aware we pay slightly more because of this decision. In these circumstances, I feel that the convenience is worth the extra money (just like the plumbing in my house).
My goal in writing this post was to add more to the list of pitfalls associated with credit cards and to ensure that, if you’re using one, you understand the issues that are involved.
What’s your take on this debate?
If you use credit cards, do you use them for the convenience or the cash-back or what? Or do you believe that using a card is not worth the risk and cost incurred? Debit cards present some differences but still have some of the same pitfalls – do you feel that using a debit card is a better idea?
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10 Responses to “A Credit Card is Not a Free 30 Day Loan”
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The problem for me with credit cards is that almost everyone “thinks” they have the discipline to handle them, while the great majority do not. This is one of the reasons credit card companies are so stinkin profitable.
I know there are some (like yourself) who can use them and benefit, but personally I can’t recommend using them for convenience because I know that some of the people I recommend it to will end up in a worse situation because of it. They are adults and should be responsible for their own actions, but I just don’t really want to be a part of it… Just my 2 cents…
Interesting post and very well written. I’m pretty much in the same camp as the author, in that I have (and use) a credit card but I only buy things that I already have the cash for. I originally got the card in my early 20s because I wanted to build some credit, so I just had a Netflix subscription go on it every month and then paid it off immediately. So for me, I use it both as a convenience and as a way to prove that I’m creditable… Card companies seem to agree with me.
@ChristianPF – I agree with what you are saying. And I do not want it to seem like I am suggesting that everyone should go out and get a credit card. I used to think it was a great deal to get the bit of cash back but I have moved away from that line of thinking. I did mention that I use a card because I wanted to be transparent and not hypocritical by railing against credit cards even though I do use one. Also, I didn’t want to come off as some pompous jerk by saying “you people can’t handle them but I can!”
So are you saying you do not use credit cards at all? Or are you saying that you don’t like to be seen as endorsing them on your blog?
@Vern – thanks for your nice comments. I agree that a credit card is something we all should be careful with like you seem to be.
I have used cards strictly for the rewards, but here is the method that I used :
Regardless of which card it is, as soon as I come home, I take the receipt and transfer the amount that was charged into my savings account, and then reconcile it on my budget sheet. This way, the money is out of my “operating account” ( checking ) as if I had used a debit card and I have reconciled the charge within my budget.
Once the statement comes in, the funds to cover it are already set aside in the savings account. I can transfer the funds back in and pay off the card.
I wouldn’t recommend this to anyone unless they are very disciplined, because it is stil easier to spend more than you have when you use plastic.
‘Nuff said!
I know this is an old post, but I just found your blog and I’m enjoying reading through it.
We use a credit card for any purchase that we possibly can. I don’t see it as “credit”, per se, but simply as a method of payment. I think you can get into almost as much trouble paying cash or using a debit card. You can just as easily spend money that was supposed to be set aside for a bill by using any of these methods. Our budget is set up using the zero-based envelope method. Each month, we allocate every cent of my husband’s income into various categories. With each purchase, we deduct that amount from what’s remaining in that category. When that category is empty, we cannot spend any more from that category, period. We would follow this method whether we were using cash, debit, or credit card to make the actual payment. I don’t believe it’s the method of payment that gets people into trouble, but failure to follow a budget. Somebody could just as easily withdrawl all of their money and claim they’re living on cash, but then not have enough money left to cover a mortgage payment or a home repair, because they failed to follow a budget.
What I like about using the credit card is that it’s easily trackable (I download transactions daily, and reconcile them with my manual entries just to make sure I haven’t missed anything), and they offer more protection that debit cards and cash. Our card also gives us Air Miles rewards, which we are saving up for a some-day family trip to Disney World. By the time our kids are old enough to enjoy the trip, we should be able to cover the whole thing with Air Miles, which is very exciting! We leave our money in a savings account for the month, and pay the bill when it arrives, which earns us a little bit of interest. I think this also differs somewhat from how some people use credit cards. I’ve heard people say that they pay their cards in full each month, so therefore there’s no problem – but in reality, they’re spending the money this month, and paying for it with NEXT month’s income. So technically, it IS debt. We are spending money that we already have in the bank. I think that’s also a consideration.
Alissa MacPhee´s latest blog post…Still here.
@Alissa – It doesn’t sound like you fall into the same credit card traps that a lot of people do. I agree that if you are proactive about your budgeting and spending that it doesn’t really matter too much which payment method you use. The big trap people fall into is spending 12-18% more when they use a card compared to cash – if you do that than the 1% cash back doesn’t look so hot anymore. It seems like you do not fall prey to that problem due to your budgeting habits.
The banks have a lot to answer for, even now the cost of credit cards is at an all time high.
Great post full of useful tips! Usually we use credit card for buying something, but sometime we can not limit to using credit card for consumtion only. I realize that you are an expert in this topic. My site is fairly new and I am also having a hard time getting my readers to leave comments.Thanks for the post
I recently came to the US – a society with high demand on convenience from a more traditional society where people have more demand on security. And it is interesting to see the difference – in my native country almost everyone have a debit card to gain from paying without cash, but nearly no one have a real credit card – people find it risky an scary to use money which is not earned yet. That is the result of too many catastrophic changes people have seen during they life. I think while the economy in the US was good and stable everyone used to have from one to ten credit cards and new that in any situation (job loss, health problems) he will find an easy way out. But last economy recession and all the resulting uncertainty made people to think that they trust they lives and the results of lots of efforts to a chance.
And it is interesting to see that people in the US start returning to the same position that people in my country have – “I don’t want to spend money not earned yet”.
My credit cards blog is there if interested.
@Prett – you provide a very interesting perspective comparing a different culture to that in the US. Thanks very much for sharing. I’ll check out your blog.