No Debt Plan

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Many of you will disagree with this sentiment, but hear me out.

Credit card companies do not generally have your best interests in mind. They want you to charge as much as possible, and take your time paying off the balance. A $10,000 credit card balance, at a 14% interest rate, with a $125/month payment will take you 229 months to pay off. That is more than 19 years. Oof!

As cash hungry as those credit card companies are, they do not pay evil henchmen to run around the United States and hold guns to consumers’ heads. Debt that is racked up on credit cards is voluntary. You picked up the card. You went to the store. You swiped it at the register. Take some personal responsibility.

Granted, the card companies try to appeal to every one of your impulses to get you to use the card. “It’s easy!” “You can pay it off later!” “Come on, it’s just this one time…” Mailer after mailer ends up at your house, full of pre-approved offers. They see it as trying to win your business. We all know they are trying to entice you into a never ending cycle.

Despite all of this, I love our two credit cards. Here’s why.

• A credit card is a tool. Other controversial items — guns, for example — have the same stigma. The credit card does not charge purchases on its own. A gun does not pull the trigger. Both are risky tools. With risk, comes responsibility. Used wisely, credit cards are a beneficial tool to have in your wallet. (For the record, I am not a fan of guns, and do not own one. I know the risk, and have made the choice against it. Credit cards can be viewed the same way. Nor am I saying they are on the same level — just making a comparison here.)
• Rewards. From August 2006 to July 2007, I earned $432 in cash back rewards with my American Express Blue Cash card. Some will argue that the risk is not worth the reward; I’ll tackle this in a future post. Yet, I’m not going to argue when I earn $400+ for simply paying my bills as I would normally.
• Purchase Protection. There are always catches, but for the most part anything I charge on my AMEX is covered. If someone on eBay rips me off, I don’t pay a dime. I use the card heavily (i.e. I make them a lot of money), so most small charges can simply become a write off for the card company. I have only had to use this protection once when I ordered a gift for my Mom from an online store that never shipped it out.
• No interest paid. We pay off the statement balance at the end of every month. Result? I’ve never paid interest on my cards. We use the cards just like they were cash.
• I don’t spend more than I would otherwise. This is the real kicker, even for people who pay off the balance at the end of every month. The common rant against credit cards is you typically charge 12-18% more than you would if you paid cash. We simply don’t do this thanks to our budget. More on budgeting later, but if you truly stick to the budget it is not possible for you to spend more than you would otherwise.
• One Payment. Well, a handful of payments. As I mentioned, we use our credit cards for almost everything including utilities, car and life insurance, groceries, and eating out. Rather than having to write a lot of checks during the month, all of those payments get bundled into two cards.
• Safer than a debit card. Some (Dave Ramsey) argue that debit cards are better than credit cards because you can’t spend more than what is in your account. This is true. If you simply can’t control your spending, don’t get a credit card. If you can, the credit card is a better option. If your debit card is stolen, all of your cash is at risk. You may get it back, but it can take a while for the bank to get everything sorted. If your credit card is stolen, your risk is limited to whatever stipulation is in your agreement. I think a common agreement is you pay nothing after the first $50 of unauthorized charges.
• Delayed Payment. This is a heavily marketed “benefit” of credit cards to consumers. Charge now, get the item now, but pay later. We always have the cash on hand to pay the bill, but get to hang on to it for a while. Thanks to ING (savings and checking), we earn at least 0.25-0.33% on those purchases each month. (3% on checking/12 = 0.25, 4% on savings/12= 0.33%). It isn’t much, but every little bit counts.

Do you use credit cards? Do you carry a balance? Do you get rewards? I am only a fan of cash back cards. Airline miles are only good on airlines. You can use cash on anything.

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