In previous Fribbles, I discussed how I have given up the use of credit cards, and substituted the debit card. Counting the many message-board posts related to the latter, it now holds the record for the all-time replies.
What kind of replies did I get? About half said they had made the same decision as I, and gave up their credit cards. A quarter said they understood why I took the steps I did, but feel that credit cards are a Foolish way to manage their budgets. The remaining quarter sent me various levels of insults. There were also a few that politely disagreed with me as to whether a debit card should be used at all, because of security issues.
Before I get into this Fribble further, please understand, I’m not telling you to use a debit card instead of a credit card. I’m sure there are plenty of people in your life that tell you how to live. If they are like the people I’ve encountered, I am sure I can’t compete with them. This Fribble, like previous ones I've written, is only about decisions I’ve made. Please, like anything here in Fooldom, evaluate your own situation, and make your own decision.
Why in the world would somebody say it was Foolish to use a credit card? The answer is obvious. You get interest-free money for the billing period, provided you pay the balance in full. Some cards give rebates, which is even better. Finally, there is the security issue. You’re not directly accessing your checking account. I certainly can’t argue with that, and didn’t really intend to.
I’ll get back to the Foolish use of credit cards, but let me address some of the disagreements first. A very serious concern for many people was safety. They were concerned that a credit-card thief could empty their entire checking accounts. I didn’t think this could be done from what I remember on the agreement, but I took the step of talking to Mellon Bank and PNC Bank about their debit cards. These banks hold you liable for the first $50 charged on your stolen debit card, if it is charged before you report it stolen. They both said they extend to you the same protection as a standard credit card. One thing that caught my attention was that Mellon Bank said you need to report the card stolen within 48 hours. Otherwise, things could get a little difficult.
How difficult is that? I was told by another person who works in credit at a bank (I won’t identify the bank here for obvious reasons) that he freezes accounts where the activity gets out of normal patterns. That’s abnormal debit activity, and a lot of bouncing checks. You see, the bank can lose a lot of money from debit-card thieves. Once your account is frozen, it certainly is going to give you a lot of hassles, especially if your paycheck is deposited electronically, and you have automated bill payment to your mortgage, etc. So, if you elect to use a debit card, make sure you keep it secure, and if you lose it, report it immediately. It’s not hard for the bank to deactivate the card. However, you want that to happen before they freeze your account because of unusual activity.
One writer had an interesting alternative. He uses American Express. American Express requires you to pay the balance every month, so it enforces a strong discipline on the cardholder. The only problem is that American Express isn’t as well accepted as MasterCard or Visa, and they charge an annual fee. However, it's an alternative to consider. They also allow you to download data into Quicken, which is another plus.
Getting back to credit-card usage. If you finally pay off your balance, isn’t it more Foolish to use your card and just pay the amount due? It certainly is. However, the creepy thing about personal finance is that we don’t always operate with the discipline and logic we should. While I have applied plenty of self restraint in many areas of my life, keeping to a strict budget was never one of them. I always spent what I made, or a little more. In fact, my investing developed because I considered it another way of spending. Instead of buying stereos, boats, cars, and other toys, I sunk a load of my income on stocks. However, I also tended to charge more some months than I should have, and always found myself paying a balance down again and again. After a while, that gets annoying. Since I don’t want to continue bad habits the rest of my life, I’ve taken an admittedly extreme step. Anyway, if you are anything like me, you may find bad habits can’t be changed overnight, and drastic measures are needed.
Using a credit card to make your life easier is certainly a Foolish way to go, provided you have acquired the discipline to live on a budget. One way to learn to live on a budget is to go without a credit card as a crutch for a while. Possibly, you may find it isn’t needed anyway, but then again I’m the guy that put 225,000 miles on his last car. Don’t take my word for it; make your own decisions.