Credit cards are not evil

I have to take Carol Costello to task for something she said on CNN”s American Morning today. Following a story on credit card spending this holiday season, she made this statement:

“It”s always good when people don”t use credit cards.”

What a load of horseshit. I have to assume that her statement comes from the incorrect belief that the typical American household is drowning in credit card debt. If you”re one of the poor saps who carries a high level of credit card debt in relation to your income (36% of households who owe more than $10,000 in credit card debt have household incomes under $50,000. Ouch), obviously adding to your debt load is a bad idea. But routine and heavy use of credit cards can be a very smart thing if managed properly.

Consider:

- If you pay off your credit card balance each month, the credit card company is giving you an interest-free short-term loan. The money floating on your credit card can be put to “work” elsewhere. If you”re really gung-ho, you could move that money to a brokerage account and try to turn a quick profit. If you”re like me and just let it sit in your bank (you do have interest-bearing checking, right? If not, see NetBank or others) you can earn a tiny amount (with today”s interest rates). But still, it”s a net positive, and if interest rates go up, you”ll make more on the float and still pay no interest to the credit card company.

- If you have a “rewards” credit card (and why wouldn”t you?), each dollar you run through the credit card pays you back in some way. After earning 100,000 SkyMiles from credit card charges, I”m back using my cash-rewards card, which pays me 1% on all charges and 5% at grocery stores and gas stations. Again, free money if you pay off the card every month.

- A lot of people use Visa-branded debit cards tied to their checking account, and while that”s good if you”d otherwise turn purchases into credit card debt, it”s not a smart decision. If your Visa debit card is stolen, you”ll get your money back, but it”ll be your money the criminals are using until your bank sorts things out. Having a couple thousand dollars disappear from your checking account for a week might not be such a good thing if that mortgage payment is due today. When a real credit card gets stolen, it”s the credit card company”s money that”s being stolen, not yours.

- A good credit card also provides 90 days of purchase protection, so if you buy that Video iPod today, pay for it in 30 days and lose it in 60 days, the credit card company will buy you a new one. Not a bad deal when you”re not paying anything for the protection.

- Cash sucks. Cash in your pocket costs you money. A $20 bill would earn me a penny per month if it sat in my checking account (hey, a principle is a principle). Many people pay money in the form of ATM fees to get cash, which is the worst idea ever. And cash is a bad thing for the businesses who get it. The labor and capital costs of counting cash, securing cash, moving cash, etc. is pure waste, especially when you consider the same costs exist to get the money to you. I can”t find good stats on what it costs to move physical money around between banks, customers, retailers and back to banks, but it”s a horribly inefficient thing when an electronic alternative is available. I think the fact that smart retailers like Starbucks and QuikTrip encourage even small purchases to be made by credit cards (they don”t make you sign for things under $25) speaks to it being better for business.

This year, The Wisdom household will run about 1,500 transactions through credit cards for everything from a $2.50 iced coffee to a $2,000 insurance payment. About 30% of our gross income will pass through our credit cards, which means through the interest float and cash-back rewards, we”ll increase our gross income by about 0.6% with zero cost. That”s about an extra day and a half of pay for doing nothing but being smart.

So please don”t tell me “it”s always good when people don”t use credit cards.”

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