Stop Idiocy

Credit cards get a bad rap. The popular opinion is that they exist solely to bilk the public out of their hard-earned money, while lining the pocketbooks of the financial elite.

But that isn’t entirely fair — when used properly, credit cards can be a valuable personal finance tool. And while it is true that credit cards are indeed a mechanism for shifting wealth from the poor to the rich (or at least, the less poor), you have nobody to blame but yourself if you’re on the short end of that stick.

The problem with credit cards

First, let’s address the major drawback to credit cards: those astronomical interest rates. The average APR on a new credit card is over 15%. Quite a few people don’t understand what that actually means, so let’s use an example: suppose you see a big-screen TV on sale for $2,500. You decide to charge it to your 15% APR credit card, because you can easily afford the $35 minimum monthly payment (and more importantly, you need that TV right now). If you don’t charge anything else to your credit card, and you diligently pay your $35 minimum every single month, you can expect to finish paying off that TV in about 172 months, at a total cost of $6,020. Yup, that’s over 14 years — it’s doubtful that the TV will even be working when you finish paying for it, sucker.

The example makes it obvious that when used in this manner, credit cards are a pretty terrible deal. And yet this is how the majority of America insists on using them: 56% of Americans carry an unpaid credit card balance from month to month, with the average amount sitting at a shocking $15,799 (source: “The Survey of Consumer Payment Choice,” Federal Reserve Bank of Boston, January 2010). The monthly interest payment alone on a balance that large is nearly $200 — no wonder credit cards have a reputation for making America poor!

So paying with cash is better, right?

In light of statistics like these, it is easy to see why some people advocate ditching credit cards forever, even after considering credit card rewards such as free airline miles. Dave Ramsey goes so far as to say that “responsible use of credit cards does not exist” and there is “no positive side to credit card use” because the free miles and rebates are essentially just scams designed to make you spend more. These people are idiots.

Perhaps instead of pointing our fingers at credit cards, we should step back and look at the poor choices that the people who are abusing them are making? If Joe American wants to buy a $2,500 TV on revolving credit with no money in the bank, we should blame his terrible self-control and non-existent basic math skills when he is crying about his mountain of debt later — not his credit card. Nobody is forcing America to use their credit cards like a bunch of impatient, spoiled children.

The reality is that when used properly, credit cards will actually save you money. A lot of it.

How credit cards can help you

First, forget about ever carrying a balance. If you can’t do that, don’t bother reading any further. And get some self-control!

With that out of the way, pretty much every credit card these days offers some type of reward. If yours doesn’t, it’s time to switch. The standard seems to be a 1% reward on all of the purchases made with the card, whether it is in the form of airline/hotel points, gift cards, cash, or something else. If you look around, you can probably do better than a flat 1% rebate — the excellent Fatwallet.com finance community can probably get you started with your research (at the time of this writing, there are several cards offering 2% rewards or more).

If we assume that you’ve got a basic 1% rebate card, and you use it responsibly (that is, you pay off your balance every month, on time), you’re effectively getting a 1% discount on absolutely everything you buy. That isn’t much, but it is certainly better than using cash. Plus it frees you from the hassle of carrying a lot of physical money around, and limits your liability in case of theft or loss.

If you do a little bit of work, and get yourself a couple of specialized cards, you can do much better than 1%. No need to go crazy filling up your wallet with a card for every conceivable situation, but cards that offer significant rebates for common purchases can be worthwhile. For example, I carry two credit cards in my wallet: one gives me 5% cash back on all gas purchases and a 3% rebate on groceries, the other gives me at least 1% (more on the “at least” in a bit) on everything else. Obviously, I use the first card at gas stations and supermarkets, and the second card for all other purchases.

After you’ve picked out the cards that give you the most value, it’s time to register them on a few online rewards sites for additional rebate opportunities. There are quite a few of them, but I recommend envaulted.com (still in beta, and requires a few weeks on a waiting list, but worth it) and idine.com over the rest. Both of these sites are 100% free, and offer cash rewards for using the credit card(s) that you’ve registered with them. Envaulted rotates new deals every week (for example, this week they’re offering 6% cashback at CVS, 15% at Petsmart, and your first $2 free at Starbucks, among others), and iDine focuses on dining, with cashback at various restaurants in your area. Best of all, the rewards at both of these sites is passive — you register your card once, and then automatically get free cash whenever you shop at a merchant that has an offer with one of them (even if you didn’t know about it). And of course, these rebates are in addition to whatever rewards you get from your credit card provider.

If you’re still not satisfied, you can take advantage of an active rebate site, such as ebates.com. These types of sites require a bit more work than the passive sites, as you’ll need to click a special link at the start of each of your online shopping sessions in order to get a discount. This means that they won’t work for brick-and-mortar stores, either. If you do a lot of online shopping, however, the benefits can easily be worth the minor hassle. Nearly every major online merchant is represented on ebates.com, and the discounts can be fairly substantial — up to 20% in some cases. And of course, these rebates will stack with the rewards that you get from the passive sites and your card provider.

Between the rewards sites, and the inherent rebates my credit cards earn me, I effectively pay about 5% less on average when using my credit card compared to the cash price. Needless to say, I use my credit card for virtually everything (and I’ve never paid a penny in finance fees — take that, Dave Ramsey!).

So if you’re using cash (or a debit card) because you believe credit cards are evil, you might want to re-think your decision. You’re paying significantly more for your purchases than you could be.