The choice to use credit cards tends to be more personal than financial. While credit card use can be the gateway to a lifetime buried in debt, it doesn’t have to be. Most people are Type A credit card users. Type A credit card users see credit cards as a tool for buying anything for which cash might not be available. This leads to spending more than one can afford, increasing debt month after month. Type A credit card users often pay interest and sometimes pay late fees, increasing the cost of the use of the credit issuer’s money.
Type B credit card users use credit cards as a spending tool. They take advantage of the float provided by credit card issuers, a form of leverage, to delay their payment, allowing their own money to keep earning interest in a savings account. Type B users pay their bill on time and in full every month, collecting valuable rewards. The fees that Type A individuals pay to credit card issuers — as well as interchange fees issuers charge merchants — cover the cost of accepting Type B credit card users. Without the income generated by borrowers who pay interest and late fees, credit card issuers might need to reduce the rewards offered to those among Type B.
There’s more about Type A versus Type B credit users in this article about breaking the credit card habit.
Pete D’Arruda is a good example of how far Type B credit card users can go. While Pete admits to occasionally carrying a balance, when he does, it’s a fraction of the $300,000 total credit limit he has over 25 credit cards. I can’t imagine why anyone would need that much credit, but Pete seems to have created this financial situation just as a proof of concept. It may have paid off. He claims to have a FICO credit score of 810-815, squarely in the “excellent” range. His good score has likely saved him thousands of dollars thanks to lower interest rates and more favorable insurance terms, and with a mix of good credit cards, he is accumulating rewards points that he can use. Pete has also used his good credit history to negotiate annual fee waivers on some of his credit cards, including the elusive Visa Black Card.
Extreme perspectives are always interesting. There are many people who, as a reaction to overspending and climbing out of debt, have sworn off credit cards completely. Any credit card use is seen as bad or dangerous. For some spenders, that might be the case. I wouldn’t suggest anyone with a tendency towards compulsive or emotional spending to seek the latest credit card offers. For people who don’t have their finances under control, credit cards can be destructive. The choice of a financially secure individual to refuse all credit card usage, despite the potential for earning rewards and taking advantage of the float is an extreme action, just like Pete is an extreme example in the opposite direction.
Moderation may be more boring, but it’s the right answer for most people. Anyone who is financially prudent can take advantage of a few, appropriate credit card offers. Not everyone, even those who are completely in control of their finances, should attempt what Pete D’Arruda has done. A few mistakes could be costly.
Photo: SqueakyMarmot
Marketwatch
Published or updated June 27, 2011.
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How fast would the downward spiral be if he started carrying sizable balances? i.e. if he used 50% of his available credit (150k) would his credit score drop, his available credit drop, his % used increased, etc.?
My credit score went up 20 points when I was accepted for a new card with a 10,000 limit. It was a surprise because I already had like $50,000 in credit available on credit cards (I don’t carry a balance on anything except $1000 on a 0% APR card)
I guess I fall into that Type B group with over $115k available on six cards. I didn’t necessarily plan it that way but the calculation of “use of available credit” does affect your credit score positively when low. My Experian score is 793 (I’m not sure how that correlates to FICO but I know it’s in the low risk zone). I use credit cards as spending tools not borrowing tools and that’s the important message here. I did get a kick out of the terms used though: I always thought paying off your CC every month is taking advantage of the “float” while leverage usually involved some kind of loan instrument going beyond a single month. But using CC to capture the interest in your saving account – wow – we all know what a windfall that is these days ;-)
Taking advantage of the float is like leverage because you have use of someone else’s money for a short period of time for zero cost (if you pay off the bill in full and on time). Although you’re not necessarily using the money to invest in the strictest sense, and although the time period is short, it’s still a way of using leverage to your advantage.
I updated the article to clarify.
I would buy that if I had an open mind, unfortunatley I haven’t been able to shake the believe that leverage is just a word used to avoid having to say debt. When firms say they are highly leveraged I hear ” up to our …. uh ears …. in debt. But that just me – please forgive.
I used to be a Type A credit user when I first started using cards and now i’ve a card b user as I try to only buy what I need not want.
I used to be a Type A credit card user in my younger days, but now am a Type B. Not sure why anyone would need 25 credit cards, but as they say, whatever floats your boat…
We climbed out of 67K in credit card debt and are now Type B users. The Type B use recently gave us 40K in airline tickets to have a FABULOUS trip to Europe!
Luckily when i was a definite type A card user i was still smart enough to turn down a card with a $150,000 limit i was approved for. I have but a $25,000 total limit between 4 cards now and find it is plenty (i pay them after each payday every 2 weeks) for my spending needs.
I am a type B and we have 2 credit cards and 1 store card. I used to think that companies loved consumers like me before I wised up and realized that they love the interest payments. But whatever works.
I use credit to get rewards (airline miles and gift cards). But I pay the balance in full each month. The only time I carried credit card debt was during my divorce, because I needed to hire a lawyer.
I agree that credit is a tool. A hammer can be used to build a house. It can also be used to break heads. A credit card, properly used, can be an asset.