Thursday, June 4, 2009

The Great Credit Card Debate - Guest Post thanks to Mr. Credit Card

As many of you know, I LOVE, LOVE, LOVE my credit cards! I make tons of money a year on my groceries, gas, and utilities. These are everyday expenses I would spend irregardless if I paid with a check or credit card. And, on top of earning money/rewards, if you use credit cards to your advantage you can positively affect your credit score!

So, I asked Mr. Credit Card to write a guest post for me!

Mr Credit Card,, reviews credit cards on his site. His credit card blog has post and advice on how to reduce credit card debt. Mr Credit Card believes that we should not have any credit card debt, but that you should make use of your credit cards to save money .

Nothing stirs up more controversy when a personal finance blogger blogs writes about whether credit cards are good or bad (or both). Such posts tend to generate lots of heated debate from both sides of the camp. Here is how the the arguments tend to go.

Those who love their credit cards

  • They folks tend to pay their bills in full every month
  • They generally have either cash back or airline cards
  • They charge everything to their cards to earn maximum reward points
  • They tend to set up automatic payments so they are always paying on time
  • They get new cards to take advantage of "bonus miles" upon sign up
  • They do not care about 0% balance transfer deals

  • Those who hate credit cards and think they are the root causes of debt

  • These folks probably had bad experiences with credit cards and got deep into debt
  • They have learned to live without credit cards
  • They claim that if they actually have to pay with cash, they tend to think twice before spending

  • Those who lie in the middle of the bell curve

  • Most folks fall somewhere in between
  • They tend to carry a balance occasionally
  • Most have some form of credit card debt

    To be upfront, I belong to the camp of those who love their credit cards, take advantage of their rewards and pay in full every month. But there are some bloggers like No Credit Needed who is against having having credit cards and just use cash. In this post, I will be try to bridge the views of the two extreme (love and hate camps) and demonstrate that we have a lot more in common than perceived. I am also going to try to convince you that credit cards can be used to your advantage and they should be treated more like "grocery coupons".

  • What do we have in common?

  • Both camps believe that we should not carry credit card debt - this is something both camps have in common. But they strive to achieve it in different manners. To the camp that loves credit cards, they find no problem in paying their bills fully every month. Those in the "dislike credit card camp" prefer not to use it so as not to fall into any "temptation"
  • Both camps are committed to staying out of debt
  • Both camps are actually VERY FRUGAL

  • What! I can already hear some of you reading in bewilderment. Here's how I would make a comparison. Let's compare using reward credit cards to grocery shopping. With either activity, you can either be very savvy or reckless. Let's see how you can be reckless first.

    Grocery Shopping by BachelorReckless Credit Card Spending
    Does not have a grocery listNo advance planning for what to buy
    Does not cut couponsDoes not use credit cards' shopping portal to earn extra rebates
    Does not use cash back credit cards to earn rebates
    Does not take advantage of sales to buy in bulkDoes not pay attention to credit card newsletter and website for discounts from various merchants

    Let's earn the mistakes from the above two examples.

    Planning - If you do not plan you will overspend. It is a well known fact that if you do not go to the supermarket with a list, you will overspend. You will be walking down aisles and see food and be tempted. Always have a list. But the same applies to credit cards. Why just have a list when you go shopping at the groceries. Shouldn't you have a list for anywhere you go? In fact it would be much easier. For example, no ordering juices for kids in restaurants (they don't finish it anyway), plain water will do just fine?

    Coupon Cutting - If you tell a savvy coupon that you go to the supermarket without coupons, she'll say "YOU"RE NUTS!". Well, if you tell a savvy credit card user or frequent flier that you do not have a cash back credit card or a airline credit card, he or she will tell you that "YOUR ARE NUTS".

    Combine supermarket coupons with manufacturer's coupon - The really savvy supermarket shopper and coupon cutter knows how combine these two and get stuff for pennies on the dollar. Well, the savvy credit card users knows how to maximize rebates and points as well by taking advantage of discounts and shopping online through their credit card's shopping portal.

    Savvy Supermarket shoppers know when to cut back - Folks who budget and are frugal are flexible in what they buy. If less income is flowing into the household, they can downgrade and choose a generic brand or private labels (same product at lower cost). The savvy credit card user is no different. If a high flying executive loses his job, or no longer flies frequently, he or she is more like to downgrade from their American Express Platinum Card to perhaps a no annual fee cash back card.

    What savvy coupon savers and credit card users have in common

    Savvy Coupon ShoppingSavvy Credit Card User
    makes a grocery listHas a budget and shopping list
    Makes use of every coupon - both manufacturer's and store couponsUse credit cards to earn extra cash rebates or air miles
    Knows when to buy in bulkKnows when seats are most likely to be available for frequent flier miles redemption and hence books way in advance

    Making the Mental Transition

    How would one who absolutely hate credit card start to actually make use of them?

    Think of Reward or Cash Back Credit Cards are like Coupon - Yes, think of your credit cards like you coupons. For every dollar that you spend on your card, you can earn cash rebates or reward points (if you choose the right credit card). Wouldn't you like to save money outside of the grocery? You would never go to AMCE without your ACME coupon. It's the same for me. I will never fill up my gas without my gas credit card.

    Plan and Budget - Before you go grocery shopping, you make your list, you plan, you know which items tend to go on sale during which month and you stock up. You can do the same with your other spending. Make a list!

  • How many gifts do you have to buy a year (or for next year)
  • - Once again, plan in advance. Figure out what you want to buy. Research and find out when they are on sale. Buy them on sale even if it is a "way in advance" purchase (hey - same as stocking up).

  • Plan what you are going to eat when you actually go out
  • - In my household, we have several rules for the kids. No juices unless it comes with the kids meal (cos they never finish it). Myself and Mrs Credit Card tend to share meals if we go to a diners where the portion is "HUGE".

    Beware of Upsells

    - In the supermarket, upsell happens at the check out counter. The candies and magazine are all meant for impulse purchase. "mommy mommy, can I have a candy" is the ultimate test. At McDonald's, the test comes in the form of "would you like a large fries and an apple pie to go with this". At the diners, it is "the brownie with vanilla ice cream is really good". It is these little subtle upsells that cause us to go over our budget.

  • Do not be tempted just because something is on sale
  • - Just because some unhealthy sweet candies is on sale does not mean you are going to buy it (even if you have coupons). Just because a brand of detergent that you do not like is on sale means you are going to buy them. The same applies to other stuff like clothes, cars, vacations etc.

    Taking Baby Steps

    Here's are baby steps to take if you feel like it:

    Step 1 : Apply the envelop system to credit cards
    - get a cash rebate credit card and start using it just for gasoline and groceries, and nothing else. Think about this as another coupon. Here's the formula :

    supermarket coupon + manufacturer's coupon + anywhere from 1% to 5% rebates from credit cards = massive savings.

    Cheapest Gas Station + 3% to 5% rebates from using credit card = huge savings.

    Step 2: Set up automatic payments
    - Set up automatic payments so that you're bills will be automatically paid from your bank account.

    Step 3: Evaluate
    : - How did you feel about this baby step. Did you pay your bills in full. Were you tempted to splurge again? Are you able to get rid of the temptation that you used to have when you hold that plastic? If this does not feel right, then stop using your credit card. If you are OK, with this and find that "hey, this is not so bad", then you can go on to step 4.

    Step 4: Put your utility bills on your credit card
    - you are going to have to pay these anyway, so you might as well earn some cash rebates or reward points.

    From here, you will have to figure out if this is the right thing for you to do. But what if you are the person that falls in the middle of the bell curve and have some credit card debt, but you wish to get rid of it but at the same time be more savvy about the way you use your credit card. Well, I would definitely get into the mindset of planning, planning and planning (for everything - budget, grocery list etc). I would also use the envelop system in the following way :

    Envelop (or Credit Card) 1 : Get a 0% balance transfer credit card to reduce your payment. Do not charge any stuff to this card. Just pay it off as soon as possible. This strategy has been used successfully by Tricia from Blogging away debt who reduced $37+k in debt over 3 years.

    Envelop (or Credit Card) 2 : Use a cash back credit card or reward card for your other purchases to earn rebates.

    Envelop 3 - Have an Emergency Fund : Credit cards may give some of you the temptation to use it as an emergency and the debt problem comes back. One way to get around that is to have a policy of having an emergency fund all the time. Better yet, factor discretionary spending or "auto maintenance", "house maintenance" and things like "birthday gifts" into your budget.

    OK - I'll leave it as that for now. Like everything else, do what works for you. If carrying cash works for you, then do so. But it will not work for everybody. But if you can be disciplined in your supermarket shopping, using coupons etc, I believe that you can make use of credit cards to "save money". It just requires a change in mindset. If you want to get a flavor of how obsessive frequent fliers are without regards to getting free airline tickets, simply go over to FlyerTalk's Forum. You'll find that they are just as diligent with their earning points from their credit cards as coupon savers.

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    Anonymous said...

    Okay, that was great! I never had thought of using my various credit cards for "envelopes." That is brilliant. I just don't do cash. And I LOVE my rewards cards. As a result of the rewards offered, of course, I have more than one and will now use them as envelopes. Thanks!!!!!

    Sharon said...

    Loved the post! I can't wait to put these great ideas into practice. I usually get credit cards to get % off first purchases or to earn $ back when initially signing up. I need to rethink and incorporate. thanks!

    SwapSavers said...

    Great post! I liked how you wrote about the reasons why people like/dislike credit cards and how the views are similar on certain topics. I love my rewards credit cards. I wrote a post about it here
    And I also write posts when you can earn 5% back on Discover Card

    Evelyn said...

    That was a great summary.

    I love my rebate cards, but I am a little worried that they will dry up next February when the new laws go in effect. Until then, I love them.

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