Author: wizardpc

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?]

One common point of resistance to getting rid of credit cards is the old “I need one to travel for my job.”

Well, that’s a load of crap. It can be done, and I have been doing it for years.

The best way to go about this is to have a company card that you are not liable for, and that you don’t pay the charges on. The bill goes directly to your company’s accounting department and they pay it after you send them your expense report. Yes, these type of cards exist. No, you’re probably not going to get a say in whether or not your company chooses this type of card.

For two years I had a card like this. Every other week I flew from Nashville to St. Louis, rented a car, and got a hotel room. I paid for everything with my company card and never once saw a bill or wrote a check. It was all very nice. I’m sure that if I ever did something stupid like buy an HDTV using that card I would at a minimum get a stern talking to, possibly all the way up to criminal charges (buying a TV for yourself with company money would be embezzlement or fraud, I’m sure).

But then! TRAGEDY! My company was bought by a very large mega corporation that you’ve probably never heard of. They had a policy of reimbursing employee expenses. Basically, employees became this multi-billion dollar company’s payday lender (without the interest). I was expected to make the charges, file my expense report, and then wait for them to reimburse me. Most people would just go get an AmEx card and hope the reimbursement check came before the bill came due. In fact, the new company had a “preferred” card for you to use (so not only were they making interest by not paying expenses directly, they were also making money in referral fees to the credit card company).

The last time I used a credit card was in 2004. I will never do it again. So, what to do?

I had two years’ worth of data telling me how much I spent for a week in St. Louis. The maximum amount of weekly charges in that period was somewhere in the $1200 range, with a touch over $1000 being the average. Luckily, these policy changes weren’t going to take affect for a couple of months so I had some time to make accommodations.

I opened up a checking account at ING Direct, and also added a money market savings account. ING gives you a MasterCard debit card for the checking account (which pays a tiny bit of interest) and allows you to instantaneously transfer money from your savings account (which pays quite a bit more interest) into your checking account. Since I was traveling every other week, I put two weeks’ worth of expenses into the savings account, plus a little extra. I could go up to five weeks waiting for reimbursement and still be okay.

Now, my coworkers all went and got the credit cards. We were told that reimbursements would be “nearly instantaneous.” That’s an exact quote. What does nearly instantaneous mean? Apparently 3-4 weeks.

So four weeks after our first trips on the new policy, my coworkers were complaining about not being reimbursed. I remember distinctly one proclaiming that he wasn’t going to pay the bill he’d just gotten in the mail.

You know, the bill for this new personal card that doesn’t affect anyone but himself.

Yeah, that’ll teach your employer!

So what were my coworkers’ choices? One possibility would have been to make a minimum payment and start accruing interest on the balance while waiting for reimbursement.

The other choice was to take money out of savings and pay the bill. That, of course, assumes they had several thousand dollars available and that they were willing to part with it not knowing when they would get paid. This choice sounds remarkably like what I did, only in reverse. I chose to part with my money first and forego the possibility of paying interest or making a late payment.

I realize that it may be difficult to suddenly switch from using a credit card to using a debit card. If you decide to go this route, just set a goal date of, say, three months from now to make the switch. Use that time to set up the new account, start putting money in it (I would actually put this at the top of your debt snowball), and switch your reimbursement account with your payroll department to this account.

It might sound scary to go this route, but if you know what your average expenses are and your reimbursement timeline, there is absolutely nothing to fear.