Sunday, June 7, 2009

Credit cards are a cheapster's best friend

As Phoebe pointed out earlier, the "financial advice for recent grads" is an editorial genre fraught with peril. It's usually about 90 percent totally obvious advice (newsflash: cooking at home is cheaper than restaurants), 5 percent useful for people who've never considered the concept of money (don't take out loans to buy depreciating assets like a new laptop even though you may think a laptop is really useful), and 5 percent wrong, like this advice to avoid credit cards lest they tempt you into financial sins.

The view that credit cards are evil conduits to oblivious profligacy is not that uncommon. Recently, I've tried to convince two different friends who were trying to save money that credit cards would help them do that, and both were very suspicious. But it's true--if you follow the one iron law of credit cards, you can in fact save money, have an easier time taking out loans on appreciating assets later, and get all kinds of nice perks like cash back and restaurant coupons* for your virtue. That rule, as I'm sure you all know, is to pay off your full balance every month, always, no matter what.

When you buy your peace-of-mind-saving latte for $3.29 at the beginning of the month and don't have to pay for it until the end of the grace period 30-60 days later, that $3.29 has accrued an additional couple cents for you in an interest-bearing savings account, and by the time you have to withdraw it to pay, it is itself worth slightly less than the original amount you paid for the latte thanks to inflation. A credit card is a convenient, brief interest-free loan that rewards you for responsible repayment with an occasional dinner at Olive Garden. Hurray!

Obviously, a credit card can be your undoing if you're already a profligate spender and just need a ready means of payment to behave like a maniac, or if you break the iron rule and start carrying even modest balances. But I suspect that for the dispositionally tight-fisted with a mortal fear of debt, that's not really a problem. I try to put everything on my card unless I'm somewhere that's cash-only. But I've never been tempted to purchase a pony or a Marc Jacobs dress with it.

Sometimes I do think that credit cards are an evil force, since their business model requires some people to break the iron rule of immediate repayment and go into debt, which may, in sum, make us a more profligate culture, though a much more transactionally fluid one. Am I contributing to financial irresponsibility and a massive culture of debt in order to feast on unlimited salad and breadsticks? No doubt some of Mastercard's debtors would be in some kind of debt anyway, but probably not all. Or does the benefit of immense financial convenience outweigh these costs? In the meantime, yes.

*One thing though about the rewards: beware the free airfare offers. They often require you to book through their travel agents and charge "booking fees" to redeem them. I prefer 1-2% cash back schemes, since even free Olive Garden breadsticks, nice though they may be, are not as good as cash moneys. Also, CapitalOne allows you to customize the image on the card, so that you can become that ridiculous person who has a photo of her cat on her credit card.


Anomie said...

I have a Capital One rewards card, and put just about everything on it. I earn enough points each year to pay for my plane ticket to ASA, then use the money I get from my department to cover the hotel, and occassionally, food.

dance said...

In awe of Anomie...I charge most everything (including every monthly bill that will let me set up autocharge) and I only collected $150 in the last year with the help of intro triple points from Amazon's card, which wouldn't buy a plane ticket anywhere.

But that pay it off requires either careful self-discipline or a reasonable cushion.

PG said...

Paying it off also requires being quite attentive to your accounts -- if you are late by even a day, you can retroactively be charged a higher interest rate on that last balance. Autopay of the whole balance on the day before it's due works only so long as you're aware of the day and transfer the money from the interest-bearing savings account to your checking account. (Unless you can autopay from a savings account? I've not had a bank account that allowed for that, but it would solve the whole problem.)

I do agree with the basic premise of the necessity of building up credit history, however. I went through college with only a debit card, and was anxious about getting a credit card precisely because of all the canards that MSI mentioned, until my financially wiser roommate told me that if I didn't have a couple credit cards, I'd have trouble getting a mortgage later in life.

Sarah said...

I can't believe you're worried about the virtue of credit cards and not about the virtue of supporting the Olive Garden!

Miss Self-Important said...

Dance: Yeah, so far I've only made about $30 in three months of having the card, but in fairness, I don't have a family and don't own a car and so can't take advantage of the 2% cash back on gas.

PG: Yes, it does require some well-scheduled money movement. I keep enough money to cover several months of my life in my Citi savings, which is linked to my Citi checking and allows for instant transfers. Then I transfer the day before the card is scheduled to pay off, and schedule the card pay off a few days in advance of the deadline. Haven't had a problem.

I have always found debit cards scarier than credit cards. What if you don't have enough cash in you checking at the precise moment of purchase? Doom!

Sarah: What's objectionable about the Olive Garden? I'm not worried about the virtue of credit cards per se. There's nothing stopping everyone from one day becoming such a good money manager that they all pay off all their balances on time and drive credit card companies out of business. The companies don't prevent anyone specifically from behaving responsibly. But they might have a net effect of discouraging responsibility.

Sarah said...

MSI: It's a cheesy chain selling mass-market food at a markup which you could easily prepare yourself, thereby getting tastier, healthier, and cheaper food?

Miss Self-Important said...

Try as I might, my salads and breadsticks have never turned out that good. The rest of their menu--meh, whatever.

dance said...

Incidentally, the serious money juggler without a cushion can use two credit cards---that is, it's better interest-wise to be able to pay off one balance entirely, even if making payments on a second balance, than to pay off part of a single balance. Once you are carrying a balance, it's best not to add to that card at all.

I'm not recommending this---as a habit, it requires a level of attention that's really stressful. And it can quickly get out of hand. But as a trick to limit the damage from a rough month, it's worth having a second card on hand in case of need.

dance said...

While I'm talking tricks---pay attention to your statement closing date. Example:

Statement closes June 10, bill due July 1.

Charge stuff on June 9th, pay for it by July 1.

Charge stuff on June 11th, pay for it by Aug 1.

This one is WAY less stress-inducing than the previous (except for those cards that vary the closing date, and unless you are depending on income--but useful for conference expenses that may get reimbursed). Sorry if it's mentioned above, blogger makes it annoying to check.

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