What I am about to say may be shocking to some in financially responsible circles: I use my credit cards more and more each year. Now, to make a disclaimer, I have never been tempted to rack up credit card debt and have only once failed to pay off the balance in full (a mistake I quickly corrected when I received the next statement, as the charges were even higher than what I had calculated). I don’t recommend that everyone use credit cards and would discourage anyone who has misused them in the past from carrying a constant temptation to increase or return to debt. (That would be too much like taking an alcoholic into a bar.)
Those who are not likely to be tempted to overspend, however, might find the same benefits in credit cards that I have been discovering. I used to see credit cards only as a way to avoid carrying too much cash (which, due to my absentmindedness, I am always afraid of losing) and to delay paying large bills so that I could eke a bit more interest out of my savings account. I never used plastic for any purchase under $10.00.
Now, however, I find myself paying for small transactions (as little as $3.00 at times) with credit cards. Why? The reward points I earn bring in more money than the checking account from which I pay the credit card bills. Most of my retail transactions are small, so I figure that the small amount of money I earn on each purchase will add up fast. (It does.)
I have even begun paying for large electric bills with credit, despite the $3.95 transaction fee that used to discourage me from doing so. My credit card gives me 3% back for utilities purchases (more if I let my cash back accumulate to $200, at which point Chase pays a bonus of $50), so any bill over $150 will earn me more cash rewards than the cost of the transaction fee. Twice, the credit card company has offered 5% back on utilities as part of a special promotion. At those times, we had extra cash, and none of our investments were paying 5%, so we charged more than our current bill — the $600 maximum allowed by the electric company — to reduce the effect of the $3.95 charge on future payments.
I use only cards with no fees and refuse to pay extra for special protections the cards offer, but I still have the extra reassurance of free no- or low-liability features that prevent me from being financially responsible if someone steals my card. If I lose my wallet, I am less likely to take a big financial loss now that I have been spending mostly on credit than when I paid mainly in cash (assuming the finder uses my money/credit but doesn’t steal my identity).
The snippet I saw of a recent television interview with Frank Abagnale, Jr. confirmed these thoughts. Abagnale, the con-man-turned-security-expert whose story is the basis for the book and movie Catch Me If You Can, explained that he always chooses credit cards over debit cards because they are far more secure. If you use a debit card and it’s stolen, he said, your checking account is wiped out. With credit, the credit card company takes most of the loss.
Knowing how much damage credit cards have caused in the lives of those who have fallen prey to their charms, I still feel a bit like I am flirting with a seducer whenever I start charging something I never would have charged in the past. I want to use cash more often, but that longtime beau seems to have given up the fight for my loyalty.
What would bring me back to cash? Financial incentives. I would love to see more stores offering discounts for those who pay in cash. After all, the store loses money every time I pull out my credit card, especially for that $3.00 transaction that pays me a dime. Digital Transactions magazine estimates that U.S. merchants paid bank card issuers $40,000,000,000 in 2007 for the privilege of taking plastic from customers (“How the Merchants’ Courthouse Capers Have Paid Off,” Digital Transactions, February 2008, p. 6).
If more of those retailers would start offering lower prices for those who use cash, they would be able to keep more of the profit. Cash-carrying customers could keep more, too. Only the credit card companies would lose. Of course, though they’d miss the stores’ fees, they’d be glad to lose the business of cardholders like me, whose cash back redemptions always exceed their (nonexistent) finance and interest fees
Image courtesy of szlea