Should I be Using Credit Cards? An Un-neccessary Evil – Revisited

PROBLEM #23: Using Credit Cards are a Part of my Life – I Can’t Give Them Up.

If you always pull out your plastic when shopping, or if you rarely ever use cash – this is a PROBLEM. This is a problem I’ve written about before – check out my first post about using credit cards.stack of credit cards

I received a lot (at least for this new-ish blogger) of feedback regarding my last post about using credit cards. Which tells me one of two things. Either you disagree with my point of view, and wanted to let me know (feedback – even negative – is great, by the way). Or perhaps you are just interested in this topic, and how others have been using credit cards in their daily lives. So, I’ve decided to offer 3 more reasons why I think you should not be using credit cards.

1. Even though you can get rewards – the potential risk is always present.

Every time you borrow money, risk is involved. It’s risk/reward. . . or high risk/high reward. They always go together. You can try to mitigate that risk by only buying things that you have planned. Or you can put money aside to cover the bill at the end of the month. You can even transfer it to another “holding” account. (I had not thought of this one. – but it’s actually quite genius) The fact remains. You are still BORROWING money – even if it’s only for a few days. The risk is always there that you won’t be able to pay it back at the end of the month.handing out money

I’m not going to throw out what-if scenarios. We’ve all heard them . . . job loss, medical emergency, etc. If you’re somewhat responsible with money, you should have some sort of emergency fund saved up to cover these things. Obviously, we are all adults here. So we make our own decisions. But, for me, I’ve decided that I’m not going to borrow from the credit card companies anymore. I can’t accept a risk (no matter how small I make it) that I can just as easily avoid.

2. While you “earn” rewards, the bank is “earning” money also.

Let me just preface this by saying – We live in a capitalist society. Everyone deserves the opportunity to make money in some fashion or another. I’m not saying that banks shouldn’t have that same chance.

big bankI don’t know how many of you realize that for every “plastic” transaction, the banks involved (card issuing bank, merchant’s bank, Visa, Mastercard, etc.) split roughly 2.0% of the transaction – which is paid by the merchant or passed on to you as the consumer. This is called an interchange fee. This interchange fee is higher for premium rewards cards. This is what we’re really talking about here. Most would not advocate using a credit card without some sort of reward. This interchange fee is also higher for internet purchases – which are considered riskier.

Now when you use a debit card, this fee is also collected. However for large banks (Think: Bank of America, Chase, Wells Fargo, etc.), this fee is capped at $0.21 + 0.05% per transaction as a result of the Durbin amendment law. For smaller banks this interchange fee can vary, but the average is $0.44 per transaction.

So let’s do the math, for a $100 purchase.

Credit card – $2.00 – to be split between the banks involved in the transaction. Higher for “rewards” cards.

Debit card – $0.26 – to be split between the banks involved in the transaction. For smaller banks the fee for the same purchase would be higher – $0.44 on average.

So if you’re trying to help the big bank’s bottom line (maybe you work there?), keep on using that rewards card. Big box stores can more easily absorb the fees (they also negotiate them lower). But trust me when I say, small businesses hate these fees. It’s awfully hard to be pro-small-business when you walk through the door brandishing your 5% cash-back card.

3. You can (if you want to) have Great “Credit” Without a Credit card.

credit score

I understand that it is easier to obtain certain things with a good credit score. Like a great interest rate on a home mortgage, apartment in a reputable complex, better insurance premiums, even a job in some situations. But a credit card is not the only thing reported to the credit bureaus. Installment loans, rent (maybe), or student loans are also reported. If you are current on these loans your credit should be good also. Check out this post over on Credit.com for more info.

Conclusions

Have I changed your mind? I didn’t think so. Honestly, I wasn’t really expecting to, but hopefully you’ve at least pondered your use (please – at least be responsible). I also wanted to present an alternative point of view regarding credit cards. They are very prevalent, and their mis-use is also prevalent. I would simply not recommend using them for the reasons outlined above.

What do you think?

If you enjoyed this post, please consider sharing it using the social media links below. Thanks.

-Chris

 

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4 Comments

  1. Pingback: Credit cards: Necessary Evil or Useful Tool - CYinnovations

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