How I Use Credit Cards … And Why

Sasha writes in with a typical question:

A lot of different personal finance bloggers have different ways that they use credit cards. Some of them don’t use them at all. Others seem to use them a lot. Where do you stand and why?

I started off answering this question for the reader mailbag, but then I realized the answer was going to be rather long and involved so I spun it off into its own post.

So, let’s break this down bit by bit.

How do you use credit cards? To put it simply, we use rewards cards for routine purchases in our life and pay off the full balance at the end of the month. If we can’t afford the purchase or haven’t budgeted for it, the credit card is not a crutch to help us purchase it.

What do you do in emergencies without the card as a crutch? We have a large emergency fund in place to deal with true emergencies – a car breaking down, a hot water heater failing, and so on. We’re able to have this emergency fund because we consistently spend far less than we earn.

Why not just use a debit card? Two reasons. First, a debit card doesn’t improve your credit score. A healthy credit score not only helps you out with things like car loans, it also reduces your insurance rates. Second, a debit card typically doesn’t provide you with any rewards for using it. Similarly, using a debit card means the money is directly pulled from your checking account, and since my wife and I have an interest checking account, we prefer to keep the cash in there so that it can earn interest before we pay the credit card bill at the end of each month.

What cards do you use? My wife and I, between us, have three active credit cards – a Citi Driver’s Edge Mastercard, an Amazon.com Visa, and a Target Visa. We use the Driver’s Edge card for gas and automotive purchases, the Amazon card for purchases on amazon.com, and the Target card for purchases from Target. This allows us to get roughly 3% back on all of our purchases on cards. These three cards take care of the vast majority of our purchasing on cards.

Don’t reward cards encourage you to spend more? No. These cards are tools, not excuses to spend more. They simply make the purchasing process more convenient (it’s easier to run a card than it is to fill out a check at the checkout) and occasionally earn us a nice reward – a 10% off card for Target, a $25 reward certificate for Amazon, or, occasionally, a check from Citi.

What’s the disadvantage of doing things this way? First of all, you have to be disciplined. If you’re tempted to buy unnecessary things simply because you have the credit to do it, this strategy won’t work. You also need to have the routine of paying your credit card bills down cold – even one late payment can wipe out the benefits of doing things this way.

To put it simply, I do not believe credit is inherently bad as some people do. I believe the big risk associated with this strategy is personal – it’s up to your organization skills and personal willpower to make it a success. I’ll be the first to admit that there was a time when I didn’t have either of those attributes – and it resulted in $17,000 in credit card debt. I had to learn how to use a card.

If you have those attributes, using a reward credit card for your routine purchases provides nothing but benefits – better credit rating, rewards, and convenience at the purchase site. For us, these benefits have been a great help over the past few years.

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  1. Jeff says:

    Don’t forget the wonderful consumer advantages to making purchases with your credit card. You can issue chargebacks if you have disputes with companies that you can’t resolve.

    I personally pay my Cox cable bill with my credit card, since cable companies are notorious for charging you after you’ve closed your account or other stuff, and I want the ability to charge back if there are problems.

    Plus, if anyone charges you improperly, it’s on a credit card and you have time to dispute it. If people charge your debit card improperly, they have your money and you can’t get it back easily.

  2. viola says:

    Another reason to use a credit card over a debit card is security. There are several cards that have random number generators to use for security when shopping online, and the credit card isn’t linked to your bank account and thus your cash.

    Althought the rewards might not be as great, Discover is one of the best I’ve used for customer service in terms of watching for potential fraudulent charges and for resolving incorrect charges.

  3. jreed says:

    I’m sitting here looking at 2 rewards checks totaling 75.00 just for using credit cards. I use them for everything including medical, dental, groceries, gas and car repairs, and business. One of my cards actually itemizes expenses for me at the end of the year.

  4. Anna says:

    I use a citi card American Express that gives you Thank You Points, 3 points for ever $1 spent. 10,000 points = $100 gift card. We collect our points (for purchases we would already by making, paying our credit card bill in full every month) and have used my points to pay for a cruise. That is technically a free cruise!!

  5. viola says:

    Oh I forgot to add that I use those random generated credit card numbers to pay my bills online, then pay off the card every month. Why not get cash back for something I have to pay anyhow?

  6. Des says:

    We use our Pentagon Federal Credit Union card strictly for gas (it gives 5% cash back on gas). Besides the reward, it is helpful for me to have one gas bill each month, rather than many small checking account debits. That way I can get a true picture of our driving habits, and I know when we need to start cutting back.

  7. Kris says:

    I didn’t know that a good credit score lowers insurance rates. Good to know!

    I’ve heard that using any kind of plastic, credit or debit, increases spending by 15-18% because the user does not associate the card with actual money in an emotional way (as he would with cash). I think that conscious credit card users can control their spending by acknowledging that it’s still money. It takes practice, but it can be done!

  8. I agree with Trent. I racked up $8,000 in CC debt before I got it under control. Now I use them to my advantage. If you don’t understand them, don’t use them.

    -Nate

  9. Brent says:

    The tricks to credit cards are discipline. shop for the right ones, use it on the right things and pay if off ontime always. I have 1 card that I use for nearly everything, because of time and large use the limit just keeps moving up. Its a small part of my safety net. Also you can think of it as a way of extending the compounding interest on your savings. But yes… one slip up and you would have been better with cash.

  10. Vladi says:

    My family have every year a Full Paid Weekend in a local All-Inclusive Resort (i live in the caribbean) totally paid by my credit card rewards.

    cool ah?

  11. Christopher Hylarides says:

    I use a cashback card because I travel for work and routinely drop $20K/month on it. I pay it off as I do my expenses and get the cash back at the end of the year to the tune of over $1000. After the $70/year fee I get all the benefits of the platinum credit card (insurance, extended warranty, etc). It works for me, but if I ever changed jobs I’d switch to a no-fee credit card.

  12. Faith says:

    I wish I had that sort of self control. After so long of abusing my credit card I don’t think that I’d be able to use them wisely. Perhaps when all the debt is paid down and I’m really “into” the frugal life I’ll be able to wisely spend my credit. Until then, I’ll keep with my cash-and-debit only world. =)

    I do get perks (like Target GCs) on my Chase debit card, so that is nice.

  13. Jerry says:

    My wife and I pay for our normal living expenses with one joint credit card, paying the c.c. in full every month. We combine all utilities and credit card charges on one Open Office spreadsheet (free software). This way, we have to discuss our expenses at least monthly, along with our investments and savings for short- and long-term goals. We may like some surprises in life, but not in our _financial_ life. We argue rarely, but almost never about money. (I think this open communication about finances, as well as weekly family meetings with our kid, is a big reason why we do not fight much. The hard stuff gets discussed and worked out before it can become an argument. But I digress.) We get 3% rebates for gas, and a $50 voucher from AAA every few months. Those vouchers pile up for 6 months until we use them to pay (some or most of) our auto insurance bill. We may change credit cards when another auto insurance company gives us a better rate or the rebates change, but for now this works well for us.

  14. CPA Kevin says:

    We use credit cards in a similar fashion to Trent – although we only have 1 main card we use for everything – Chase Freedom Signature. We make about $500 annually in rewards dollars. Not too bad for everyday spending we’d do anyway.

    I may have to look into the Target card though since we do a lot of shopping there.

  15. Nick Dunlap says:

    This is good advice until the credit card company pulls a fast one on you. I believe that there is more risk in using credit cards than people know.

  16. Sandy E. says:

    I have one credit card, a rewards one, that I use for 1) online purchases, 2) airline tickets, and 3) large dept. store purchases. I have online banking, and as soon as the purchase hits my account, I pay it off, so sometimes 4x a month or so, depending upon how often I use it. If I can’t pay off a purchase immediately, then I don’t purchase it. My mindset is to pay off my charge card as though my life depended on it. I’m very discplined that way – about maintaining a 0 balance. It’s very important to me. I want to stay in front of the “8 ball”, not behind it.
    So long as I can afford to purchase things without going into debt, I do so readily – don’t have a problem spending responsibly at all.

  17. ScottC says:

    I find one of the most valuable services you can get with credit cards is free warranty extension. I got a $700 repair done on my laptop (replacing the screen and wireless card) through American Express for free a year after the normal warranty ran out. Typically warranties are set to expire just before the vast majority of defects occur (statistically.. this is how they set their quality standards and warranty periods to be most cost effective for them). All you need to do is keep track of your receipts.

    In addition, I have used credit cards to handle a fair bit of debt from college. After building up credit, I’ve kept a several thousand dollar balance for over 5 years (paying off bits and adding more when necessary) and have paid roughly 3% annually on it.. I do this by transferring the balance once a year to a new 0% card. Typically the transfer incurs a 3% or 5% charge. Since I know I will be carrying the balance for most or all of the time it is on that card, I effectively pay somewhere around $50 a year in order to have the privilege of spending several thousand dollars years in advance of when I actually have it. This only works of course if you are careful with your money. If you miss a payment, your rates can easily go right up to 15% and then it gets costly.

  18. J Brown says:

    I think during the debt reduction step, you have to CUT up the credit cards. This serves two purposes: 1 – you do not get anymore debt, 2 – you are forced into step 1. Only after you have your debt gone/under control, should you begin to consider using the rewards on credit. I am using my debt card more, but have concerns about the amount due during fraud. I have a second bank for this purpose. I tend to agree with Dave R on this – when you use cash, you spend less.

  19. Using plastic may not encourage Trent to spend more, but the statistics show that in general it does, even if you pay the balance every month. Impulse purchases are so much easier with plastic. It does not take much impulse spending to effectively negate the cash rewards feature of the cards. The credit card proponents conveniently overlook this.

  20. Lisa says:

    You know it is funny but when I went to moving to keeping everything on credit, I started to spend less. I hated seeing that big bill at the end of the month (even though I knew it was coming and planned for it). It made me think more about what I was doing to see it all hit at one time rather than $20 here and $50 there.

    We use the hilton honors amex – lots of points per dollar and we use them to pay for our vacation hotels – free hotels in Scotland, Wales, Hawaii, CA – it was worth it.

  21. Johanna says:

    @Mr. ToughMoneyLove: The statistics show that people spend more when they use credit cards than when they use cash, but that’s not the same thing as showing that credit cards encourage people to spend more. The causal relationship is often the other way around: They don’t spend more because they’re using plastic, they use plastic because they’re spending more.

    Like Trent, I use my credit card for routine purchases, but for small purchases (under $10) I often use cash, either because the store has an explicit “minimum purchase” policy for credit-card transactions or because they encourage cash for smaller purchases. Back when I used cash for routine purchases, I would still use plastic (it was a debit card then, not a credit card, but it’s the same idea) for large purchases so that I wouldn’t have to carry a lot of cash or keep hitting up the ATM. Either way, the plastic didn’t necessarily cause me to spend more – spending more caused me to use plastic.

  22. Bill McCollam says:

    I’m glad to see this article. Too often commentators take a simple “credit cards = bad” approach to advice, when as the poster points out – cc’s are simply a tool. In fact, when you think about it – you’re at a major disadvantage when you don’t use credit cards and get the rewards that are already built into the price of what youre purchasing.

  23. Mark L says:

    When we moved from credit to cash (a la Dave Ramsey), we started spending less. It really is amazing how much you save when budget it more closely. Now, I love Dave, and I believe that credit cards are generally bad, because we are a society that lacks self-control. I have not gone 100% away from them, more like 99%. I use them for very specific things: big ticket items ($1000+) that I don’t want to use the debit for. I’ve been burned by multiple charges on an item and had to argue to get fees waived. So, now I use the credit – but only when I have the cash to pay it off in the account right away.

    It does take quite a bit of control, but that’s the main thing you have to do – get a system that gives you that control.

  24. Steve says:

    Rewards cards are a tragedy of the commons. As an individual, you get 1% to 5% of your purchases back as cash or other rewards. As a society where a large fraction of transactions go through plastic, 1-3% or more of those transactions go through a middleman that doesn’t add any real value.

  25. @Johanna – Your argument fails when you take into account online shopping, including those TV channel spending magnets. Without plastic, those impulse purchases would not be possible. It’s not necessary to prove that plastic causes you to spend more impulsively, only that it enables you to do so. There are many exceptions to the rule, of which you and Trent may be two. But the rule prevails overall.

  26. Des says:

    @ToughMoneyLove

    “It’s not necessary to prove that plastic causes you to spend more impulsively, only that it enables you to do so.”

    The same thing can be said of cash. When I leave my cash at home and only carry my card (either debit or credit) I don’t buy crap from the vending machines at work (for example).

    Johanna is correct about the causal relationship. People often mistakenly believe that because two factors correspond to one another, that one is CAUSING the other, which is not necessarily the case.

  27. Luke says:

    Using Credit Cards is definitely dependent upon the psychology of the user. I am, like you, one to use it as a tool – one of a myriad of ways that I can pay for a transaction – cash, credit card, gift card, rebate debit card, barter, etc. If someone cannot keep to their budget because they might overspend because of the credit card, then they should probably not use one.

  28. JC says:

    I prefer using a credit card (paid off in full each month) because I can see where I spend my money (online and in my statement). For me, cash is much harder to track. If most of my purchases are at the grocery store, then I’m doing good.

    If you travel out of the US, CAPITAL ONE is one of the few remaining credit card companies that charge no foreign transaction fees.

  29. Jamie says:

    Hi,

    I like your middle of the road stance on credit cards- just wanted to add one thing about using credit cards to build your score- be sure never to charge more than 1/3 of your credit limit at any given time. When they report to the bureaus, they do not report that you’ve paid your balance in full each month, just what the balance is at that time. If you have a $500 limit and you owe $495 when they report, even if you pay it off at the end of the month, this can lower your credit score because of the high utilization.

    Thanks for a great post and a great blog!

    Jamie

  30. Johanna says:

    @ToughMoneyLove: So what are you suggesting? That people not have plastic at all, not even debit cards? That sounds awfully impractical.

  31. Anne says:

    Credit cards use is like alcohol use. Some use credit cards with discipline and responsibility. However, there are those who, like alcoholics, cannot handle credit cards, and must totally abstain from using them.

  32. Good advice on how to properly use credit cards . . .

  33. Amy H. says:

    Another reason to use credit cards rather than debit cards when shopping online — Visa (and I believe MasterCard) limit your exposure to fraudulent purchases to $50.00. There is no corresponding protection for debit cards. And if your checking account (on which your debit card draws) is also linked to your savings account or a credit line for overdraft protection, you could lose everything in that savings account or credit line as well. So it is ***not*** a good idea to use debit cards as a substitute for credit cards.

  34. Kathryn says:

    I’ll add my voice to those that disagree with the “studies that show” that credit cards encourage spending. I have personally found that my impulse spending decreased significantly when I switched to the credit card…I think because there is a paper trail making me accountable for exactly what I bought. I used to burn through a couple of hundred a month on impulse purchases; now nothing gets purchased that I’m not ready to see on the statement at the end of the month.

  35. shelly says:

    We use a Capital One Rewards Card for everyday spending, such as groceries and gas, and pay it off each month. I try to keep the monthly credit card bill no more than the mortgage payment otherwise I feel like we’re spending too much. I like seeing everything itemized and categorized. I lose track of spending too easily when I use cash. I was saving up points to use for a vacation but ended up using the points we earned to get the kids a Wii for Christmas. The points were free and we saved money on holiday spending. Maybe next year we’ll have enough points to help pay for that vacation.

  36. Troy says:

    Actually, several statistics do show that credit card usage causes higher spending than either cash or debit cards.

    Beyond that, the biggest issue with credit cards is the fact that most users must “lose” so that the few may “win”.

    approx 60% of users carry a balance. So the basic business model forces a majority of users a cost for a benefit of the minority.

    Using a credit card also creates debt. It may be debt with no interest, and it may be debt for a short time, sometimes just a few days, but it is debt. For groceries. For gum. Why would someone go into debt for a gallon of milk?

    Apparently lots of you.

    But our society subdues that fact as common practice and on we go. Gone is the simple action of actually paying for something when you want it. Or actually buying your gas or groceries, rather than borrowing them for 30 days.

    I guess it is all in the way it is percieved, which is what CC companies want. They want you to focus on the freedom, the convience,the rewards. Not the action,but the perception.

    Debit cards carry no interest, are convienent, safe, just a secure as credit cards, have no bills, statements, default clauses, arbirtary rate or term modifications.

    The rewards. How about the reward of actually paying for what you purchase. Right there.

    Regarding credit scores. You sont have to use a credit card tohave a good credit score. You don’t even need a card for a good score. And even if you do have a card, you dont have to use it. The fact the credit is available is the benefit, not the balance. It is called credit utilization ratio. Never use it, your ratio is always 100%. can’t get any better than that.

    But do what works for you.

  37. kitty says:

    @ToughMoneyLove – statistics can be misleading. First as Johanna correctly said correlation isn’t equal causation. People who overspend use cards more often – typical selection bias.

    Additionally, averages mean nothing unless you know the distribution. “This disease affects men in their 50s. There are two known cases – a 2 year old boy and a 98 old man.” Take 5 people one of which seriously overspends with cards i.e. spends 100% more than he would without cards and 4 people that spend about the same and you’ll get “people spend 20% more on the average”. We know that over half of credit card users carry a balance which means by definition they spend significantly more than they would’ve without cards. These people affect the averages considerably. There is no study that specifically looked at those who pay their bills in full every month. Additionally, without knowing the details of each study, how it was conducted, flaws, distribution, we cannot really say how reliable the results are. Look at medical studies – unless it is a well conducted randomized control trial (RCT) the results are sometimes shown wrong some years later; sometimes even an RCT has flaws – bad randomization or something else. But population-based studies are often shown to be wrong years later.

    I like Anne’s comparison with alcohol too.

    People are different. Credit cards certainly enable people to spend more. Some people find temptation too high – they shouldn’t use plastic. For others – the mere thought of a seeing a large bill and having to part with a large amount of money or to have any money wasted on interest is a huge deterrent. There are also people for whom cash in the pocket just screams “spend me”.

    I’ve never had spending problem with cards, and I haven’t even grown up in the US. I’ve always thought whether I want to buy something first, then decided on a method of payment. Maybe it’s because I have strong math background or because my parents are very frugal and practical and taught me the value of money. They weren’t afraid to tell me “this toy is too expensive” when I was a child.

    The trick is really to view credit card bill as any other bill. There are a lot of bills where we use first and pay at the end of the month – phone, electricity, gas. We don’t normally run A/C at 68 degrees non-stop in summer or heating at 78 degree in winter while we walk around in summer clothes just because the bill comes at the end of the month.

    Not that I don’t occasionally make a stupid purchase or two, but I’ve done more of them using cash than cards. Especially on vacation abroad where I am much more reluctant to take out my credit card than to spend cash in foreign currency.

    One other advantage of cards – ability to dispute the charge. Say you bought something and the item isn’t delivered or you or you paid a deposit and the contractor doesn’t show up. You can call the card and cancel the payment.

    “This is good advice until the credit card company pulls a fast one on you. I believe that there is more risk in using credit cards than people know.”
    Haven’t happened to me in over 20 years. Haven’t happened to my parents in about the same number of years — and they got their first credit card when they were in their mid- and late- 40s; and their English communication skills left a lot to be desired. Really, if credit card companies couldn’t “pull a fast one” on some refugees from the Soviet Union who haven’t even seen a check until they came to the US, how do they manage to do it to so many Americans?

    But – there is nothing wrong in not using credit cards for whatever reason. Once upon a time I dated a guy who didn’t get a card out of principle – his grandfather taught him not to borrow money, it was part of his values. Just as good a reason as any.

  38. Michael says:

    While the rewards, cash back, and other perks may be tempting, I prefer not to deal with credit card companies at all. The CC company are pretty smart. They wouldn’t be offering those rewards if they weren’t getting something out of it… even those of you who are disciplined.

    In Trent’s example, two of the three credit cards he says he has are from specific retailers: Amazon and Target. So, subconsciously when Trent and/or his wife are deciding to make a purchase, they are naturally going to gravitate toward those 2 retailer. It may even keep them from shopping around for a “better” deal because they’re aiming for rewards from those two cards.

    Another example of the advantage of cash is at the grocery store. My wife and I take our budgeted amount of cash into the store for our shopping trips. There is no chance of us going over. We’ve even had to put things back to keep under the cash budget. However, using a credit card gives me a crutch to spend just a “little bit” over my budget. Those little bits can be real budget busters over the course of year.

    To those of you who worship the credit card rewards, more power to you. As for me, I prefer to play by my rules, not theres. I know they’re not doing anything nice for me and as a Floridian, I know better than to swim with the Gators.

  39. First, I am not proposing a ban on credit cards. I am stating that for most card users, the rewards feature is more of a rationalization than a wealth-building tool. Why do you think that credit card companies offer rewards? Because they know from their own studies that it increases use of the cards and therefore their revenues. There are many anecdotal exceptions, such as those offered by the readers of this blog.

  40. Troy says:

    Here is another issue.

    The name Credit Card.

    Why is it named a “credit” card. Simple accounting says there are credits, which are additions and debits, which are subtractions.

    Credit cards should therefore add to your account when used. But they don’t.

    Why are they not called what they are. Debt cards. I have a feeling that doesn’t have the same “ring” to it.

    IS your mortgage a credit? car loan? no. Then why is this considered a “credit” card.

    Because it is clever marketing, like virtually everything else associated with this business.

    And “credit” cards are not a form or method of payment. They are a method of debt. A form of borrowing. A liability. You pay for nothing when you use a credit card until you pay your monthly bill. So many common, generalized, accepted misconceptions.

    The issue is not the individual use of credit cards but the collective use of them. Individually they have been proven to be effective and beneficial.

    But collectively they are not beneficial. They are a drain. An expense. A noose. And a cash cow for the issuer. That is who actually gets the credit. The issuer. They get the addition. Society gets the subtraction.

  41. deRuiter says:

    I use an airlines credit card for a small ebay business. It’s great for having all expenses in one place at the end of the year. Also the card I used last year (canceled it rather than renewed and have to pay a fee, use them one year free and then switch) gave double miles for Post Office so the $4,000. I paid for postage (using the buyer’s money) netted me 8000 miles. YOU HAVE TO PAY THEM OFF TWICE A MONTH VIA INTERNET TRANSFERS AND YOU CAN’T GET HURT.

  42. Jennifer says:

    In response to Amy’s post that Debit cards aren’t protected in the same way as Credit cards, I work for a major US Bank and as far as I know all Debit cards branded with the Mastercard or Visa logo have the same protection as a Credit Card. The protection is inherent with the MC/Visa branding.

    That being said, I am a HUGE proponent of using rewards credit cards if one can properly manage their account by paying if off each month (personally, I monitor account online and pay it off weekly) and only spend what they can afford. My hubby & I are going to Europe this fall with airline tickets we got by redeeming miles. The flights are free and we’re only having to pay for lodging, food and other spending.

  43. cyndi says:

    I use my credit card to autodraft my son’s school tuition. I pay the credit card bill each month and get the reward points for something I am paying for anyway.

  44. CanadianKate says:

    One point only raised once here is the expense to the merchants for the convenience of offering their customers the choice to use a credit card. My son tells me that the merchant fees have gone up recently and are now tiered to the kind of card (with business cards having a higher processing fee than personal ones.)

    When I’m in a small shop, I’ll use cash in order to increase the profit for the owner. It is one way I can support local businesses more fully. In this economy, I consider each purchase carefully, not just price but where an item was made and where and how I buy it.

    At Walmart, purchases will go on credit, but at our general store (I live rurally) it is cash or my debit card because it reduces the proprietor’s cost of doing business. Our general store is the only place we can get to during storms, and the only local place that hires teens in our village, so I want to keep him in business.

    So when making the cash/credit decision, please consider the merchant costs as well.

  45. CanadianKate says:

    I travel overseas a lot and my credit card does not have a chip in it so I have trouble using it at small retailers (i.e. cheap restaurants and grocery stores, not fancy restaurants or high end shops.) As well, after my card being double billed multiple times by taxis in my own city, we’ve stopped paying those by credit card as well.

    So, when I’m on the road I use cash. I actually spent 7 days in Rome without any credit card transactions and that 28 day trip ended up with only 6 transactions in total – 2 hotels (two were paid in cash) and some train tickets between cities or airport trains.

    I find I spend way less and save on the exchange rate. I take cash out of bank machines in each country and if I take too much, I just use the excess to reduce my hotel bill before paying the balance on a credit card. If it looks like I don’t have enough, I’ll often go into extreme frugal mode for the last couple of days.

    If you’ve only got 50 Euros in your pocket and you know dinner will be 30 and you have to get to the airport the next morning, it is easy to pass by the stores and not even look in. So I avoid buying a lot of ‘things’ just because I don’t want to spend the cash.

    I’ve never carried a balance on my card so I don’t use cash to avoid interest or getting further into debt, I just use it because it is a way of avoiding temptation when I travel. The world is full of a lot of gorgeous ‘stuff’ and it is easy to think that I’m worth ‘spending a little on.’

    And just because you can afford something is not a reason to buy it.

  46. Nick says:

    I agree with Mr. ToughMoneyLove. I think the credit card companies know what they are doing, and they do what they can and sometimes what they shouldn’t to keep people in debt. They are just waiting for people to slip up on paying the bill off at the end of the month.

    They love the naivete of people that claim that being able to spend money that is not yours is not a temptation to most people including themselves.

    When I run out of cash, spending more is just not an option. With credit cards, it is.

  47. Debbie M says:

    Spending more is correlated with credit card use because if you are spending more than you can afford on a credit card, you don’t get a rejection, a bounced check fee, or anything like that–things just get paid. You don’t have to pay attention.

    The way I get around that is to pay attention anyway. I have changed one of the columns in my checkbook register to show credit card purchases. So at any time, I can see the total in my checking account (say, $750) and the total in my credit card accounts (say -$300) and the running total (in this case $450). So I’m always buying things with money I already have.

    People who pay with cash get the same benefit–they see how much they have left each time they pay for something.

    As for keeping track of what you spent your money on, I find that a lot easier with receipts than with credit card statements, even though you can’t always get a receipt. Knowing that I went to Target doesn’t really help me remember a month later exactly what I bought.

  48. mona says:

    I am new to the idea of cash back bonus credit cards. My debit card at US Bank also has a function that if you use it as a credit card you get cash back. Is that the same thing you are talking about? Does anyone else have that function – and could you explain it to me please? Should I be using it as a credit card instead of always using it as a debit? Thank you

  49. MB says:

    I was raised to view the credit card as an alternative to the debit card, where it is harder to get cash but easier to use in a store–and with better protection against theft. As far as I was concerned, it was an absolute roue that the balance must be paid off in full every month.

    I was genuinely confused the first time I heard of someone racking up this strange thing called “credit card debt”. Unfortunately, I’m now more familiar with the meaning of the phrase, but not personally. I’ve never run up any of that kind of debt.

    My husband and I have three credit cards–one for him, one for me, and one that never leaves the house and has all of our automatic bills go to it (phone, internet, Netflix, etc.). Its an easy system to use, I have no problem with overspending, and it works fine for me.

  50. KoryO says:

    I have a debit card, but will NEVER use it again after my bank screwed up and posted a charge three times. That caused my rent check and my car payment check to bounce even though there was enough money in the account to pay for them before the triple charge. (The bank ran through the triple charge, then put my rent check through because it was larger, and then my car payment check. Two NSF fees on top of that, then. Those were $39 each. Lovely.)

    Yes, the bank oh so generously gave me back the NSF charges, and I fortunately had an understanding landlord and a credit union that worked with me on the car loan while the situation was resolved. But the three days worth of time wasted fixing someone else’s mistake made me a big believer in using my credit cards from that point on (and yes, I pay them in full, and the rewards from the Upromise card are going to help my boy go to school someday). Yes, I did have one double charge on another card five years ago…..but that irritation never put me at risk of having the repo man looking for my ride, or ticking off my landlord.

    The one thing that I really didn’t expect while sorting this mess out was hearing from the bank’s own employees that they themselves NEVER use debit cards…..because they KNOW what kind of mess can happen when they get screwed up.

    Sorry, I’m gonna charge it and pay it online. I don’t have time to fix my bank’s mistakes, thank you.

  51. Mule Skinner says:

    I use a credit card mostly for convenience. I charge $1000 to $2000 every month, but I pay it off when the statement comes in. It also yields flight miles, so one of these days I’ll go somewhere. My wife has a separate card, primarily to establish an independant credit rating. It has been many many years since I was even one month late in paying. Usually that only happened because I lost track of the due date and failed to get it in on time.

  52. Marc says:

    CanadianKate brings up the excellent issue of merchant costs. This is great advice for use of credit cards (if you have the required self-discipline) but I do tend to use cash more for local merchants and credit for even small transactions at large chains out of concern (or lack thereof!) to locals.

  53. By and large, I use credit cards because of convenience, rewards and the security for online transactions. But I only have two credit cards in my wallet.

    I agree with the author that one has to learn how to use the credit card. Easy credit has fuelled the want-it-now mentality but the gratification will come back to haunt us.

  54. Elizabeth says:

    I use a CC for pretty much everything, but pay it off at the end of each month. I find that it’s much easier to track my spending that way and as a result I’m less tempted to spend then with cash. With cash, since I don’t have to repay it later, I tend to make more impulse purchases. And when I pay with cash, I don’t know where the money went since I don’t keep up with receipts (or in many cases don’t get one at all at places like farmer’s markets.)

    Plus with the CC, I get 1% back on everything that I buy. This has added up to nearly $200 over the course of 3 years.

  55. Stephen says:

    @Troy (comment #48):

    I’m sorry. That’s incorrect.

    While I do agree that credit card companies sometimes do facilitate reckless spending, I feel that it is necessary to correct a few of the “common, generalized, accepted misconceptions” in your post.

    Credits and debits are not as simple as additions and subtractions. In double-entry accounting, credits as increases or decreases to accounts depending on their type (e.g., assets or liabilities). The term ‘credit’ is more often used to describe the creation of a liability (i.e. purchasing merchandise on credit).

    I suspect that your confusion that credits=additions and debits=subtractions originates from the misleading (but ubiquitous) use of the terms on a bank statement. When a bank debits your account, it is reducing its liability to you, the account holder. When it credits your account, it is increasing its liability to you. From your perspective, the exact opposite is happening. This is double-entry accounting (in case you would like to learn more) and it as simple as accounting gets. Banks have traditionally used these terms relative to their own books, not how it relates from an account holder’s perspective.

    With this understanding of credits and debits and the nature of liabilities, can a mortgage or car loan be considered “credit”? Indeed, they increase your liability (amount owed to the lender). From your financial perspective, increasing your personal liabilities can be considered credits.

    You’re absolutely correct that using a credit card creates a liability. When you purchase something on credit you are borrowing funds from the credit card company for short-term liquidity.

    I don’t mean to single you out, Troy. I can recall struggling in school to reconcile the differences between my bank statement and what I was learning in my accounting courses. In my opinion, the name ‘credit card’ is not a marketing gimmick. It’s just another unfortunate victim of funky bank jargon and our assumption that statements should reflect the perspective of the account holder.

    I realize that most people probably don’t care about this distinction or that I might not have communicated it clearly. For that, I apologize for being a stereotypical accountant.

  56. Melody says:

    CandianKate is right – and the merchant fees for Visa/Mastercard are resetting again April 1st. As a small business that accepts credit cards, it does eat into our pockets a bit to accept them. BUT, if we didn’t we would loose-out on some business. Maybe not in the long-run, but those of you who run businesses (or have good heads for math) can understand that cash-flow is the lifeblood of any business! I would rather pay 3% on average to get your $1,000 now, than wait another month or more to get it via check. That $997 dollars (as an example, my math stinks) helps me with immediate bills, etc. and keeps my own financial house current.
    And for the record most of the customers I deal with indeed use reward cards of some kind for the same reasons listed in the post and comments. Since I sell home theater/automation equipment and service, that $1,000 was low. I would say my average CC sale is probably more like $3,000. But if I was paying 3% or more per transaction on a $10 widget, I’d need to be selling quite a few widgets to make up the difference.

  57. Melody says:

    Just another point on the personal side –
    My mother told me about this because she works at a mail order catalog company and she gets customer service calls about it quite often. If you use your debit card – even as a ‘credit’ card, and the merchant runs it to verify funds BEFORE charging you, then ships/delivers, etc. the item – then REALLY charges you for it, you could have a double charge in your account for up to a couple days until the first batch is released. This has caused many people to overdraw and get NSF and other fees. So – don’t use your Debit card to buy something you don’t have at least 2x the amount of in your checking account! This happened to me one time after she warned me about it, and thankfully it was for something that didn’t break me. But, until she told me I had no idea and the time it happened (about 2 years ago) was the only time I’ve ever noticed it. That doesn’t mean it hasn’t happened, just that my balance has been such I haven’t noticed the funds drop.
    Another point to make, for those who are bemoaning problems with bank debit cards and straightening-out messes: it is a function of the bank system in general, not just the debit cards!
    In 2005 I had to completely close my account with my bank and open another one w/ the paycheck I had just received. I had late fees for about 2 months and NSF fees because another customer of the bank had her checks printed by a 3rd party and didn’t check them right. She had her information (name/addy, etc) but on the bottom was printed *my* checking account #. The bank forced me to close my account and re-start fresh while it took them almost 5 months to get it straightened-out and get me my money back. Of course at that point the financial damage was done. I lost everything except what money I had week-to-week for five months!
    So soon as I can get comfortable enough (and I can get a CC again) to use credit the ‘right’ way I am absolutely going to start doing what Trent and others do. Until you have a problem with your company like some are now (having their account balances lowered out-of-the-blue) I see no reason to run from responsible use of credit cards. No, the issuer won’t make money off you – but as they are realizing now; they really never were. Because forcing people into debt based on future income in a land where Bankruptcy is possible? Dumb.

  58. J says:

    I’m with Anne. It’s amazing how much of this discussion (pro and con) resembles discussion on using addicting substances (like alcohol or cigarettes).

    My personal experience has been that we only keep a CC for exceptional spending, like the occasional business trip or something from an online merchant. We also keep one from a merchant we buy clothing from, which garners us 10-20% off purchases and coupons for clothes we need to buy for our kids. We pay it off every month. However, there was a time we carried a balance.

    I also used to drink more alcohol. Never to a “I’ve got a real problem” stage, but now I’ll have one or two drinks every week. Dealing with the headaches involved with hangovers or eternal balances, fees and interest payments just isn’t worth it. Now, we budget monthly and pay for some things with cash and others with debit. We check the debit categories a few times a month in Quicken to make sure they are on track, and adjust spending accordingly.

  59. JJ says:

    I recently became a reader of your blog and love that it gives a clear description of common sense strategies to get out of debt and stay out of debt.

    The only thing I’d like to add about using credit cards to pay for everyday expenses is that you need to check how that credit card calculates APR. I just found out that 2 of my cards calculate it daily and that there is NO GRACE PERIOD on new charges. I was so angry when I found this out having just paid off all of my credit card debt and only used them to kept them active. I’m not sure what I will do with these 2 cards since my husband and I are trying to build a good credit score and don’t want to close them. Any suggestions?

    One other thing as an FYI, some debit cards do offer rewards programs. My husband and I haven’t had to pay for gasoline in 3 months because our debit card rewards program has earned enough points to purchase gas cards.

    Thanks again for all of your suggestions!

  60. kitty says:

    @CanadianKate(comment #39)

    About merchant fees. They pay it for debit cards as well as credit cards, so by using a debit cards you aren’t saving them money.
    If you use your debit card as credit than the fee goes to the Visa or Master Card company – depending on whose brand your card is. This is these companies business model – they get merchant fees on both debit and credit cards while banks profits from lending itself (or when people don’t pay, it’s banks that lose money, not Visa or MC).

    If you use your debit card as debit then, unless I am mistaken, the fees go to the bank. Why do you think some banks offer high interest checking if you use your debit card for purchases a few times – they want fees.

    So while by paying by check or cash you do save merchants money, you don’t do it by using debit vs credit. They’ll pay fees with either.

    @TML – again, what you say is true “on the average” probably because more than half of the users carries balances. Like with most averages it doesn’t say anything about individuals.

  61. kentuckyliz says:

    I use a cc for online transactions, travel tickets (travel accident insurance free, and try getting a refund from a bankrupt airline if you paid cash or used debit–not happening), and for significant purchases for which I want the warranty. I don’t carry a balance. Used to, but it took a good long time to dig out from my youthful stupidity.

    For ordinary expenses on a regular basis, I like the cash envelope system. Food, Gas, Entertainment, Blow. (Not cocaine.) If you know anything about data mining, you know the plus of cash: staying off the grid!

  62. Jennifer says:

    I love my Discover as well, for Sam’s club. We get a few hundred dollars back each year from using it. One Sam’s club trip is free each year!

  63. Lorentzen says:

    I never use credit cards and I never will.
    I have so many friends that buys stuff on credit and I never have. I save and spend with MY money and today I am 33 and have more money than any of my friends and no debts. Thats the lifestyle I want and goin to teach my kids. Belive me is a good life when you dont have do any payments. I take vactioan any time I want, I dont wait for a free one on my creditcard.

  64. Melanie J. says:

    Hey, I just wanted to correct you on one point…debit cards do offer rewards now. I have a Chase Debit Card and I rack up points that I can then trade in for gift cards and such. I know some other banks offer this as well.

  65. You all are kidding yourselves if you think you are coming out ahead on these things. Billion dollar banks and finance companies don’t make money by giving out free benefits. They are either making money off of you or even if you are coming out ahead it is at someone else’s expense.

  66. Tim says:

    What about the study Dave Ramsey quotes where they examined people who paid with cash to people who paid with credit card. The people who paid with credit card paid a considerable % more than the ones with cash.
    The reason: it psychologically hurts when you feel that actual hard earned cash leave your hand, the card makes it way too easy.
    What are your thoughts on this?

  67. TStrump says:

    I put as much of my living expenses on my card, as possible.
    It makes it easier to track my expenses with software and I get cash back.
    You have to be disciplined, though.

  68. You really have to be disciplined. A decade ago I wasn’t and that lack of discipline resulted in $16,000 credit card debt. I use a rewards AMEX card. Use the year end reports to track my expenses and target the areas where I would like to decrease spending in the coming year. I take the rewards and pay off the balance monthly. To answer Tim from his March 24th post. Frugality does become ingrained and as a result I purchase at a discount. I’ll check out Dave Ramsey, but essentially I use the credit card as if I am paying cash which I essentially am since I pay off the balance monthly.

  69. Swap Savers says:

    Great article. I agree with you. I also use credit cards for the cash back programs and have earned a lot of money from it.

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