Ana at Debt Free Revolution and I are debating about using credit cards in 25 Reasons to Love Credit Cards and Ways Credit Card Companies Separate You From Your Money.
So far it seems as though the majority of the debate is what can a credit card do that a debit card can’t do? And it seems as though the fraud protection component as Eden points out is somewhat confusing.
But other earning potentials still exist for credit cards. In fact, if you can find a debit card that offers 2%-5% cashback, offers float, and can make us $11,000 per year in credit card arbitrage then you might have me sold!
To put things in perspective we have some financial rules we live by when using credit cards. We do not live beyond our means. All of our credit card purchases are paid in full at the end of the month and we do not pay any interest.
Many of the cons are associated with carrying balances, paying interest, and spending more than you can afford.
Here’s a look at some of Ana’s points and my counterpoints:
Double-Cycle Interest Billing (paying two months interest in one month):
I don’t believe in carrying a balance on credit cards or paying interest. If you always pay your purchases in full, you don’t have to worry how many times they charge you interest. (I will admit it is pretty dirty though).
Rate-Jacking (or raising your interest rate):
Again, if you are paying in full, the interest rate shouldn’t be an issue.
Bait and Switch (or approving you for a higher interest rate):
As Deepali points out in the comments:
Also, bait-and-switch isn’t really that, it’s more like failure to read the fine print. The 0% isn’t guaranteed until they pull your credit report and make a decision, and they’re somewhat upfront about this (ie, it’s in the disclaimer, but the responsibility is on you to read it).
Ana does make some great points that I agree with:
- Universal Default sucks, especially if it is due to inaccurate information.
- Moving the Due Date game, like what happened to Lynnae is really not cool and I too would be steaming mad!
Ana refers to credit cards as “hot” (venomous) snakes. Wow! What I’d really like you to consider is if you only use a credit card for what you can afford, you don’t carry a balance and don’t pay interest aren’t credit cards more like soft cuddly teddy bears? Ok, I’m not going to go that far… but there are benefits that result in financial gain if you can use the cards responsibly.
This has been an interesting discussion. I have to admit that credit cards clearly have the win when it comes to rewards programs- that is the one feature that tempts me. I’m not sure it outweighs my distaste for the companies behind the credit cards though.
“Soft cuddly teddy bears”? Let’s be realistic: real bears have big teeth and bigger claws…so that is a very apt analogy. Let me get another cup of coffee and continue the debate over on my blog!
Double cycle billing is the thing I hate the most about credit cards – but it’s easy enough to not sign up for a card that uses it. If any of my cards switch to it I will cancel that card immediately. You have to remember that it’s just what you agree to though – there’s no law that says credit cards always have to charge interest on the daily balance with a grace period. As long as people know what they’re getting in to it’s their choice.
Other than that I’m with you all the way. I use my favorite card for everything I can and even let trusted people run large purchases through it to get more Aeroplan points. I haven’t carried a balance since I overcame the slow periods at the start of my freelancing business so I think the points I end up getting will justify the low annual fee.
$11K a year – I gotta get more organized!
Looks like cc are like fire. A great servant, but a terrible master.
So if we are okay on our financial basics, like Madison says, then the cc becomes an useful tool.
Otherwise, it just drives us deeper into a mess.
I have one card, and always pay the balance each blling cycle.
But arbing and all that….I am not cut out for that, I think.
Why bother using them for a “float” if you have enough money?
@ green 3: I just use the float to earn extra interest in my checking account. It’s not much, but every little bit adds up.
About debit card fraud protection. One biggest difference I see from credit cards is that with debit cards by the time you notice the fraud (when you get the monthly statement), the money is already taken from you bank account. At some point after you report the fraud you get your money back (it could take some time) but in the meantime you are out of money. This can create problems if the fraudalent charges are large enough to cause all of the checks you’ve written before you noticed the problem to bounce. With credit cards, the disputed amount is “in limbo”. Even if you use automatic payment in full as I do, you still get the statement in the mail before they deduct the full amount of purchases – they always do it on the due date.
Regarding Lynnae story. As I understand it, it is not about moving the date, it is about her paying before the beginning of the cycle, i.e. before she got the bill. If you always pay in full, this isn’t a problem: after you pay for one month, your balance is 0. At this point if you send the check for the current month purchases, the balance becomes negative (i.e. you have credit). When the next month purchases cycle, the purchase amount is added to the previous (negative) balance, and your next month bill is 0. I’ve done it once when I wanted to give some money to my poor relatives in another country and didn’t want to carry cash around or use ATMs several times; or pay interest on cash advance. I sent a large check to credit card company preemptively before leaving the US. Then when I went to a bank in this country, showed the credit card and asked for cash advance. This reset my CC balance to 0 (not counting new purchases), and I avoided paying interest on cash advance. My next bill simply included my new purchases, but no balance and no charges.
Lynnae, on the other hand, had a debt that she was repaying, so her balance was greater than 0. So when the bank got her check before the new cycle – i.e. amount due in their computers was still 0, but she still had balance – their computers “assumed” it was simply an additional payment on her total debt. Much like if you send an extra check to a mortgage company before they send you next month bill. Is it new month payment or additional principle? They don’t have a crystal ball to figure it out. I’d imagine it is all automated, so when the “amount due” is still shown as 0, the sent amount is deducted from the total debt, but this doesn’t reduce the next month bill.
The easiest way to avoid this problem as well as that with due date changes is to use automatic payment. You still should pay attention to bills and know when your due date is this month. This way the credit card will always deduct the full amount (my case) or minimum payment (Lynnae case) on the due date. Then, Lynnae could send additional payments herself, but she’d be guaranteed never to miss a payment.