Let's Talk Credit Cards

 

There are few things in the world of budgets and good habits that can spark a debate like the credit card.  Many conservative financial minds pronounce doom on anyone who would use them, and while I certainly agree with a lot of their reasons, I have a hard time with the broad generalization that nothing good can come from credit card use.  For a financially disciplined person with good habits, a good credit card can provide you many rewards, along with some degree of protection and peace of mind. Now before I go any further, it’s important to explain my view of a credit card.  I view my card exactly as I would view a debit or a charge card.  There is NO discussion of interest rates or penalties of any kind because I would never pay interest or penalties.  I pay my bill in full every month.  It’s not a choice; I’ve thrown out of my mind any notion of being able to spend money that I don’t have.  Instead of carrying around envelopes of cash (which I totally endorse, this is simply another way) I carry around a small credit card which has no theft or fraud risk, I spend money within the budget, I track and write down my purchases, and I know where I stand.  For me, it’s no different than cash, and I have never once felt like I spend more money because I have a credit card.  You can cite studies or experts all day long who say I spend more with a credit card, but again, that’s a broad generalization and I just don’t feel like it’s true for me and my situation (but I’ve been called crazy before). I’m also not justifying credit card use for anyone who doesn’t feel like it would work for them.  You know you.  Nobody else does.  If you even have the slightest doubt in your ability to control your spending, don’t do it. 

 

As a side note to this point, something that really helps me is using a money management program to track your finances (we use Quicken).  You have the ability to group your different accounts (checking/savings/credit cards/investments) how you would like to see them to get a broader picture of your financial situation.  I group our checking accounts and our credit card account (all short term liquid money) in one group, so the total amount of money it shows is always subtracting all of our expenses, credit card or otherwise.  That way we never get confused about how much money we actually have.  I RARELY log onto the bank or credit card websites and look at my accounts individually; I use Quicken so I’m always getting the holistic look at our financial picture. Returning to the point, if you decide a credit card may be for you, there are some great benefits.  Most credit cards come with very good fraud and loss protection services so you don’t have to worry about unauthorized charges, etc.  Many have additional concierge, warranty and return protection types of services.  I like the idea that if I lose my card I can make one phone call and the problem is solved, rather than worrying about a bunch of cash I may have just lost.  And lastly, the only real reason I would ever get a credit card is because of the rewards programs.  There are many to choose from, and as long as you are paying your bill on time, in full, and keeping to your financial plan and budget, these rewards programs really can be a very good deal. 

 

 I am a large proponent of American Express if you are going to have a credit card.  They are a great company that is known for great customer service, being very easy to work with, and having some of the best rewards programs available.  I think of these rewards programs as just that, a reward.  I am a fan of the travel rewards programs because it kind of forces me to do something I wouldn’t otherwise.  Cash back can be great too, but I know that I will just spend it on groceries and maybe go out to dinner and it will be gone.  Having hotel points encourages me to use a hotel, which is good for the body and soul.  I have outlined some of American Express’ popular options below.  I have done my best to make sure this information is accurate, but I do not guarantee it, and I am not affiliated in any way with American Express or any company that these cards represent. (It was in spreadsheet form, but it wouldn't upload. Sorry it's a little harder to compare with them like this. Sigh.)

**Assume that you want to go to Disneyland for 5 nights in October and you have accrued 40,000 points.  (Prices obtained March 2, 2012.)

Delta SkyMiles: 

Annual Fee: $95

Reward Accrual: 1 Mile per dollar spent

Points/Miles Cost: 40,000 per round trip ticket

Actual Cost: $500

Value of 40,000: $750

Starwoods Hotel: 

Annual Fee: $65

Reward Accrual: 1 point per dollar spent

Points/Miles Cost: 10,000 per Night plus 5th night free

Actual Cost: $230

Value of 40,000: $1,150

Costco AMEX: 

Annual Fee: None with your paid Costco membership

Reward Accrual: 3% cash back on gas; 2% on travel and restaurants; 1% on everything else

Assume 1.25% cashback on 60,000

Value of 40,000: $750 

As you may be able to tell, we have the Starwoods card, and we love it.  It is a great value and like I mentioned, it encourages us to take vacations and enjoy life a bit.  I understand that 40,000 points can take awhile to accrue, but I look at it as rewards I would have not otherwise had.  Even if I can only reap a benefit every couple of years, I didn’t do much for it.  The only thing you pay is the annual fee and as you can see, it more than pays for itself in the end.