The Good, the Bad and the Ugly of Credit Cards, Part 1: The Good
If you listen to gurus like Dave Ramsey, you may find yourself feeling like you’re listening to a sermon in which the evil character is the credit card rather than the devil. Perhaps the two are interchangeable. Yes, credit card companies use marketing to lure customers with the hope of making tons of money in late fees, interest fees, annual fees, ad infinitum.
One could say this is little different than seminar leaders who use marketing to lure customers with the hope of making tons of money in sales of books, seminars, board games, bobble-heads, ad infinitum, but that isn’t the crux of what I’m writing about. All businesses must make money in a capitalist society. That’s not the point.
Credit cards are not inherently evil. The idea that all credit cards should not be used by all people is a blanket statement that doesn’t reflect reality. Here is where I stand on the issue.
I agree that many people should not be extended credit. Someone who does not handle alcohol should not be given drinks. More to the point, alcoholics should not be given virtually unlimited access to alcohol, much the same way habitual spenders may not be able to handle access to credit.
Despite what should or should not happen, in most cases customers are adults, capable of making their own decisions about spending. If they want to carry a balance from month to month, paying interest fees and possibly other fees as well, it is a free world.
Some will argue that it’s a good thing that fee-payers (let’s call them “Type A” for now) are not restricted because it allows credit card companies to offer cash back bonuses or travel rewards, which can be maximized by responsible customers (“Type B”). These fees paid by Type As (in addition to transaction fees charged the merchants) subsidize Type Bs.
Yes, these reward programs are still not much more than marketing ploys designed to get people in the door and hopefully pay the company lots of extra money (when Type Bs become Type As). But you can beat the credit cards by being completely responsible by paying on time, every time the full balance every month.
Sometimes credit card companies border unscrupulous and will do everything in their power to screw the customer, including shortening the grace period without notice or accidentally mis-billing. A quick call to customer service usually solves this “problem,” but involves a level of intelligence and positive action by the customer. I’ll look at some of these issues in the next part of this series.
Do people spend more with credit cards than they would with cash? It’s certainly possible, but irrelevant if the card user is intelligent enough to spend only what they can cover with cash when the bill is due. What if an emergency arises, like the loss of a job before the due date? The intelligent individual has an emergency fund or another type of plan ready to go in this event.
Part 1: The Good
Thanks to the generous bonuses offered by credit card companies — once again, to lure customers in in the hope they will screw up — people who are diligent can come out ahead. If the customer watches each step they take as well as every notice from the credit issuer, he can take advantage of the credit card companies rather than the other way around.
When my apartment complex decided to start taking rent payments by credit card again, I was ecstatic. Now, it may not be a good idea for all the tenants in the development to pay their rent by credit card; I can’t speak for their financial situations. Every time I charge rent, I transfer the same amount from my checking account into savings so the money is put aside and earning interest until the bill is due over 30 days later.
This is what businesses call leverage. Basically, the credit card company gives me a free loan every month when I pay my rent with a credit card. You can look at it another way: my apartment complex lets me keep my cash for at least another month. I am free to earn interest on that money in my savings account. This is irony at its most beautiful: Rather than paying interest to credit card companies, I am earning interest on money that was already due to the landlord.
On top of the interest I’m earning, the credit card I use provides me with cash back for every single transaction. (Here’s a comparison of cash back (rebate) credit cards.) I’m earning interest and cash back on a bill I’d have to pay anyway, whether with a credit card or cash. The amount I pay with cash or by credit card is exactly the same. Therefore, paying by credit card is a much better deal for me.
This is the case for many people interviewed by Liz Pulliam Weston for her recent article, People Who Charge Everything.
These “plastic warriors” are determined to charge everything they can to their credit cards so they can maximize their rewards. They don’t carry balances — paying interest would wipe out their benefits — but they put every purchase and bill possible on their cards.
“We figure if we have to pay for something, we might as well be earning something in return,” summed up Winston-Salem, N.C., resident Kelly Piercy, who charges utility, cell-phone and Internet bills, among others.
It’s not about spending more on cards because it’s easier. These are expenses that would have to be paid anyway, and the amounts would not change based on the method of payment.
Another often overlooked advantage to credit cards is the fraud protection they provide. You take risks whenever you engage in any transaction. With a credit card, the risk is that you won’t be able to pay the bill (a risk which intelligent people as stated above will hedge through existence of an emergency fund or plan). With cash (including checks), the risk is you will be defrauded and you will be responsible for the total sum.
Nevertheless, there are a number of caveats to this philosophy. Even the most astute Type B credit card rebate aficionado will encounter many traps. In the next part of this short series, we’ll look at the dark side of credit cards.
I’ll end with a question: How would your life be different without credit cards?