Debt Free Living: But I Pay Mine Off Every Month! Edition

One common excuse reason people give for keeping a credit card is that they pay it off every month, so it’s okay for them to keep it.

I have never understood this logic. If you have the money to make all the purchases, why not just use the money instead of the credit?

I covered this about two years ago and got some interesting responses, which I’d like to address again here.

Reason #1: Credit cards are safer than debit cards
This used to be true many years ago. MANY years ago. It hasn’t been true for more than a decade now, but people still believe this myth. Today, Visa and MasterCard provide the exact same protections to debit cards as they do to credit cards. EXACTLY the same. People go through some serious mental gymnastics to try to counter this simple fact, but it says it right there on their websites. It’s a lot like telling people that the Earth isn’t flat or that fire really can melt steel–no matter what evidence you show them, some people will simply refuse to believe it. Don’t be that guy, please!

(One note, though: If the crook gets your PIN and card number, there are no protections. That’s also true of credit cards that allow cash advances, though. My advice is to always run your debit card as a credit card in case you run into a situation where the vendor is compromised and an attacker is collecting card numbers and PINs. Small chance, but it happens.)

The difference, of course, is that when someone steals your debit card and uses it as a credit card, the money comes directly out of your account. About ten years ago someone stole my debit card and within 24 hours I got ALL my money back. If that happened to me today and I needed to make a purchase during that 24 hour period, I’d use the emergency fund. You would already have that before cancelling all your cards, remember?

Reason #2: I get points/rewards/cash back for using a credit card
Same goes for debit cards. Your bank may not offer rewards on debit cards, but if it’s important enough for you then all you have to do is switch banks.

Reason #3: It keeps my credit score up
So what? The only reason to have a credit score is to borrow money. Please understand there is a distinction between having bad credit and having no credit. As you pay things off and close accounts, your credit score will likely fall, but anyone who runs a credit check on you will see that it isn’t because you’re not paying your bills. Now, someone may try to bring up that with a low credit score you may have to pay a deposit on utilities, but that’s only true for a very narrow subset of the population. Basically for this scenario to be possible you would have meet all the following criteria:

  1. Enough of a credit history to have attained an acceptable score at one time.
  2. Closed enough accounts to make your score no longer acceptable.
  3. Not already doing business with the utility company, or had an account with them in the last year.
  4. Not transferring service from somewhere else

For example, when I moved from one county to another, all I had to do to avoid putting down a deposit on my electricity was call my old electric utility and have them send the new company a letter of credit. Basically, they told the new company “This guy has been paying us on time for xx months with no delinquencies.” No deposit needed. I moved back to the first county 360 days later and didn’t need a deposit or a credit letter since I’d had an account there recently.

Now, if I had been living with a roommate for a few years and all utilities were in his name, including the lease, I would have had to put up a deposit. I seem to recall having to do this for my first apartment after college, and I had a great credit score!

Other than that, there isn’t a real, concrete reason to worry about what your credit score is doing. It just doesn’t affect your daily life.

Reason #4: I act responsibly with my card
Then you will also act responsibly with your debit card and cash.

Okay, so those are some of the excuses reasons why people keep their credit cards. Now for some of the reasons you should be terrified of them:

Reason #1: You spend more, generally
Research shows that when you use credit cards, you will spend more than you would with cash. Who cares that you get 2% cash back when you spend 40% more?

Reason #2: You’ll be tempted to use the card rather than the emergency fund
Remember how I said in the Starter Emergency Fund post that the emergency fund needs to be inconvenient? The point of it being hard to use is so that you don’t “accidentally” use it for something that’s not an emergency. Well, if you’ve got this hard to use cash reserve, and this easy to use credit card, which one are you more likely to use?

Reason #3: It’s a whole lot easier to get in trouble
I don’t have credit cards, so it’s impossible for me to “accidentally” accrue credit card debt. It’s also impossible for me to rationalize spending more than I should in an emergency situation. Case in point: Recently a friend of mine had her car totaled. A drunk driver slammed into her parked car, and then ran off never to be seen again. She and her husband are a one car family, and had purchased the car a few months earlier from a family member for $1200. It was a great deal, and the car was fully insured. The check they got from insurance was for $5,000! Not a bad deal!

This friend is of the “I’m a responsible person, so it’s okay for me to have a credit card” mindset. She asked for my help looking for cars, and at one point found a car she loved for $6,000. When I asked her if she had the extra $1,000 for the purchase price and the money to cover taxes, tag, and title fees, she told me that her plan was to just get a cash advance on her credit card. This is a person who spent a couple of years fighting to get out of credit card debt, yet this thought crossed her mind. I doubt she would’ve considered this course if she didn’t already have the card–she just would have avoided cars slightly outside of her price range. She didn’t end up getting that particular car, but I don’t know if she did end up using a cash advance at a 20% + prime rate to finance the car she did buy.

Reason #4: The Credit Card companies hate you and will think of new and interesting ways to totally screw you.
Do you know what a deadbeat is? You may think it means someone who doesn’t pay, but if you are in the credit card industry it means someone who doesn’t pay interest, ie the “but I pay mine off every month!” customers. After the CARD act was passed, banks started talking about these deadbeat customers and how they will no longer get a “free ride.” The first wave of this is the return of the annual fee. There are also countless consumer complaints and stories about credit card companies and banks either holding payment until after the due date (so you default, get a fee, and they charge you 30% interest that month) or rejecting payment altogether. They do this because most people will only fight about it for a very short amount of time before accepting defeat and paying up.

So, there you have it. I suspect I’ll get a lot of haterade for this one, because people are pretty set in their dogma about credit. Let ‘er rip!

[ETA: I originally wrote this post before Bank of America announced they would start charging $60 a year for debit cards. The easy solution there is to switch to another bank. I mean really, after all the shit they’ve pulled why were you still there anyway?]

12 comments to Debt Free Living: But I Pay Mine Off Every Month! Edition

  • Jeffrey H

    Reason 1 isn’t entirely valid. When I have had my debit card stolen (it has happened multiple times) they have taken about $1500 each time. While I did get the money back it took the bank in both cases about 3 weeks before they gave me a temporary credit and I had to cover my rent/mortgage out of my savings. For the typical American that doesn’t save anything they are screwed if they debit card gets stolen as they will have trouble paying the bills while they wait on the bank to give them their money back.

    Contrast that with Amex or Discover where when your card number is stolen you call them or go on the website and say I didn’t make those charges and they are gone and you are done. It doesn’t cost you money out of pocket temporarily or the time. When a Visa has been stolen I have had to fill out an affidavit but even in that case it cost me nothing out of pocket. I am all for using the debit card where it makes sense (maybe the grocery store and target), but I will never again hand a debit card to a waiter (who may skim it when they walk off), either use a credit card or pay cash if you aren’t in control of your card.

  • My advice is to always run your debit card as a credit card in case you run into a situation where the vendor is compromised and an attacker is collecting card numbers and PINs. Small chance, but it happens.

    This is happening (at the transaction point) more and more frequently, actually. Micheal’s (hobby/craft chain stores) had around 80 stores across 20 states where their card readers were physically compromised for several months earlier this year.

    I got hit back in February (which, thinking about it now, may have been from buying something at Michael’s for a project). Fortunately, Visa caught it and checked the purchases with me before I actually got charged for any of it, but I was still stuck using cash for a week or so until I could get a new card. Since then, I’ve always run my card as credit.

    For the typical American that doesn’t save anything they are screwed if they debit card gets stolen as they will have trouble paying the bills while they wait on the bank to give them their money back.

    The real problem is contained in the first part of the quoted sentence. Also, as our wise host pointed out in the post, this is one reason you have the emergency fund established before cancelling all your credit cards.

    Realistically though, whether you have any savings or not, keeping the bill money in a separate account from the money for day-to-day expenses is the best way to prevent this problem (as well as being a good way to avoid “accidentally” spending money you need for bills. Even if the day-to-day account gets compromised, you can still pay the bills, and in the worst case, you have the ability to juggle the bill payments so you can meet your daily expenses until either your next payday or until the bank covers your losses.

    Now, someone may try to bring up that with a low credit score you may have to pay a deposit on utilities, but that’s only true for a very narrow subset of the population.

    Plus, while it may be a bit of a financial hit when you are first setting up the utility, in most cases you get it back after a year of paying on time, and I believe they also have to keep it in an interest-bearing account and pay you any earned interest, as well.

    Reason #3: It’s a whole lot easier to get in trouble

    This is exactly why I gave up credit cards years ago – I kept getting in trouble because it was too tempting to just say “I’ll pay it off the next paycheck.” This eventually snowballs into a recurring balance and higher monthly payments, especially if you’re already living paycheck to paycheck, or even close to it.

    Once you have that emergency fund, there really is no excuse for keeping a credit card, anymore.

  • This is where I disagree the MOST vehemently with Dave Ramsey followers.

    I have a number of credit cards, most of which are used for business trips and expenses. I use them for the convenience. I pay them off every month, and have a couple of rewards based cards, and they both have a (nominal) annual fee, which I gladly pay. Why? Because it’s MUCH more convenient to write ONE check a month for “ABC Business Expenses” and I do the same thing for all of my recurring home expenses.

    Electricity? Automagically charged to the rewards card. Gas? Same thing. Cable TV and internet? Charge it. I write ONE check a month for household expenses, and I’m done.

    I pay around $100 a year for each card, in the form of an annual fee, I don’t pay any interest because the cards are paid off on time, and I get 1%-2.5% cash back and/or airline miles that well exceed what I pay in annual fees.

    The only reasons I can fathom that people DON’T use credit cards like this is because they either a) don’t have the will power to NOT run up the card, or b) because they “don’t believe in” or just have shitty credit and don’t qualify. Both of which are usually related to a).

    • wizardpc

      So, to recap: You have an additional step (writing a check to pay for things you paid with a CC instead of a DC), and you gladly pay hundreds of dollars a year for the privilege?

      This is considered wise?

  • Ken

    Re. Reason #3: Some of us don’t own a house yet, but hope to in the future. We will never be able to pay cash for a house. How, precisely, do you suggest that we purchase a home without an active credit score?

    • wizardpc

      Manual Underwriting. It’s how people got mortgages before banks outsourced their due diligence to Fair Isaac. It’s also how I got my mortgage two years ago.

      First broker we went to said, “Oh, no, they don’t do that anymore.” So we told him we’d use someone else that could. Miraculously he was able to find several banks that still did manual underwriting when we threatened to take our business elsewhere*.

      I have a series of posts in a couple of weeks that go through the process.

      *[We took it elsewhere anyway because he lied to us]

  • I still don’t understand your recommending debit cards over credit cards. If we pay off our credit card in full every month, and it’s a no fee card, what’s the disadvantage? We also get reward points which we use routinely.

    As to, “If you have the money to make the purchase (with a credit card), why not use cash?” We prefer to use a credit cards because we track EVERY purchase on our statement every month. That’s much harder to do with cash.

    We could do the same with a debit card statement, but we refuse to use debit cards.

    Also, by not carrying around a lot of cash we limit our loss if our wallet/purse is lost or stolen. We keep cash on hand in person to a minimum. (With a cash reserve in the gun safe at home for large scale emergencies when CC machines may be down).

    As to a debit card, why would I want a card that is automatically connected to my bank accounts? That brings up the whole issue of overdrafts, debit card fraud, etc.

    I know you say that “debit cards are as safe as credit cards these days”, but I still disagree.

    I did just five minutes Googling and here are just a few of the relatively recent articles (not 10 years old)on the riks with debit cards.

    http://www.depositaccounts.com/forum/thread/3192-reasons-why-credit-cards-are-safer-than-debit-cards.html

    http://online.wsj.com/article/SB10001424052748704062804575509812733666240.html

    Note that debit cards are covered under a different law then credit cards, and that bank policies are not law, and that even if you do get the money back, it can take much longer and you have the problems with bounced checks, etc, in the meantime.

    I just don’t see the advantage of debit cards. If you pay off your bill in full every month, as we do, and track your expenses, as we do, there are definite advantages to a credit card over a debit card.

    The key though is to financially responsible and live within your means. So many people can’t do that.

    • wizardpc

      Please don’t consider this a Fisk. It’s an answer.
      I still don’t understand your recommending debit cards over credit cards.
      Because my default position is NOT “go in to debt” if I want to buy a cheeseburger.

      If we pay off our credit card in full every month, and it’s a no fee card, what’s the disadvantage?
      Well, you spend more, generally. Plus all the other things mentioned in the post.

      We also get reward points which we use routinely.
      You can also do that with debit cards. So what’s the advantage of using a credit card?

      As to, “If you have the money to make the purchase (with a credit card), why not use cash?” We prefer to use a credit cards because we track EVERY purchase on our statement every month. That’s much harder to do with cash.
      I should not have used the word “cash” here. You are right. What I meant was “money you already have.”

      We could do the same with a debit card statement, but we refuse to use debit cards.
      That nullifies the previous argument about being able to track your expenses. You can do it with a debit card, you just refuse to.

      As to a debit card, why would I want a card that is automatically connected to my bank accounts?
      Unless you mail a paper check, your credit card is connected to your bank account. Check your cardholder agreement. If you’ve ever paid electronically, they can scarf your house payment right out of your checking account if you’re late paying your bill.

      That brings up the whole issue of overdrafts, debit card fraud, etc
      If you’re responsible and watch your credit card statements like you say you do, I cannot imagine a scenario where you would have an overdraft. You have to intentionally sign up for “overdraft protection” which allows the bank to charge you for spending more than you have. If you don’t opt-in to this, the banks simply deny the purchase. But you’d never get in to that situation if you followed a budget.

      As far as debit card fraud, it’s really a non starter. You can have someone do exactly the same thing with ACH or checks, not to mention the apparently rampant credit card fraud that exists (I wouldn’t know, but people keep bring it up so it must be really, really common). I can’t think of a scenario where someone could steal your debit info but not be able to steal info from another non-cash transaction.

      I know you say that “debit cards are as safe as credit cards these days”, but I still disagree.

      I did just five minutes Googling and here are just a few of the relatively recent articles (not 10 years old)on the riks with debit cards.

      http://www.depositaccounts.com/forum/thread/3192-reasons-why-credit-cards-are-safer-than-debit-cards.html

      http://online.wsj.com/article/SB10001424052748704062804575509812733666240.html

      Both of those articles are misleading because they assume situations that are unlikely to happen, are just as likely to happen with debit cards as credit cards, or are a result of someone being irresponsible. For example, in the first article the author talks about “Phantom Charges” from hotels, where the hotel charges you for your stay at the beginning of your stay rather than the end. Why would you ever leave for a trip without being able to pay for it?. If you don’t have enough money to pay for your hotel when you check in, you’re probably not going to have the money when you check out, either. As far as the gas station charges, I have never seen that happen in the 8 years I have been using debit cards exclusively, and I used to travel a LOT. I’m sure it’s out there….somewhere…but this is easily fixable: Don’t spend all your money. Have a reserve, if you’re worried about this.

      The WSJ article even says that 80% of banks will replace your stolen funds within 24 hours, and that some major banks give you a 60 day window to report a loss. It also spends a great deal of time talking about the debit card user’s obligation to show “reasonable care” in preventing your card being stolen. Somehow, they forget to mention that the same clauses are in credit card agreements as well.

      Note that debit cards are covered under a different law then credit cards, and that bank policies are not law, and that even if you do get the money back, it can take much longer and you have the problems with bounced checks, etc, in the meantime.
      Policies may not be law, but they are real world. Do you really think that Wells Fargo would say, “Oh, I know our stated policy is to refund your stolen money within 24 hours, but I don’t like your shoes so I’m taking the full 10 days we’re legally entitled to.”?

      If they started doing that, would you stay a customer? Would anyone?

      As far as the bounced check thing goes, when my debit card was stolen, the crook spend $600. I had $150 in my account, and there were $200 in overdraft fees associated with the theft. The bank covered it because my card had been stolen.

      I just don’t see the advantage of debit cards. If you pay off your bill in full every month, as we do, and track your expenses, as we do, there are definite advantages to a credit card over a debit card.
      The advantage is not going in to debt for a cheeseburger. Everything you can do with a credit card, you can do with a debit card. Everything except go in to debt.

      The key though is to financially responsible and live within your means. So many people can’t do that.
      And here, I think, is where the fundamental difference is. I don’t going in to debt for coffee is being financially responsible. A lot of people seem to think it is.

  • I thought I left a long comment. Either it didn’t go through after all, or it’s in your Spam filter.

    • wizardpc

      It was in my spam bucket. It’s approved now. I only moderate first time commenters, so after that if a comment doesn’t show up it’s because Akismet or WordPress didn’t like it. I think the issue it had with that comment was that it had more than one link. I’ll up that limit.

  • I figured it was a spam trap thing, especially since it had links. Thanks.

  • Rob “As to a debit card, why would I want a card that is automatically connected to my bank accounts?”

    WPC “Unless you mail a paper check, your credit card is connected to your bank account. Check your cardholder agreement.”

    We do mail a paper check. We also refused to connect our credit card to our bank account. In fact, we don’t have ANYTHING connected to our bank account. We still pay bills by checks through the mail.

    Heck, I even set up a special bank account for PayPal so I could get paid by Examiner.com, and transfer that money to a bank account, but not have PayPal connected to our “real” bank account. After I get paid into PayPal I transfer that money to the bank account, and once it’s at $100 or so, withdraw it and put it in our “real” bank account.

    You can say I’m a bit financially paranoid if you like. I won’t dispute that.

    We’re just going to have to agree to disagree on the whole CC v. Debit card issue. We agree on the main point of “Don’t be in debt” and “live within your means.”

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