Tuesday, March 11, 2008

in defence of plastic

Back in August of last year I described some of our personal finance habits that allow us to save and invest a significant portion of our income, in a post called 'how i manage day to day'.

I would like to elaborate on point #3 on that list, which was: Use Credit Cards

I often think credit cards get a bad rap in personal finance circles. Credit Cards seem to be the Antichrist of personal finance. Television programs like 'Til Debt Do Us Part' etc. often demonize credit cards as an evil that causes debt. I would agree that in undisciplined hands credit cards can certainly be dangerous. Credit card debt is the worst type of debt, as interest rates are normally 18%+. Having a piece of plastic that has the power to buy anything you desire for no money down can be detrimental to many people's finances in a big way. Not paying credit card balances in full each month is probably the single worst mistake most people can make in managing their finances. That being said, for those of us who strive to grow our net worth and achieve financial freedom, credit cards are a saving grace.

It is widely known that several credit cards are equipped with rewards programs that may or may not have annual fees attached. Some offer cash back, air miles, and other various points programs. While some of these are worthwhile programs, especially those free of annual fees, these programs have nothing to do with why I think credit cards are plastic gold for the financially aware. The reason why I view credit cards as great tools for getting ahead financially are the following:
  • Zero Transaction Costs. Banks are thieves when it comes to fees. Every debit card transaction you make contributes to your monthly transaction total which can cost you around $0.60/transaction if you complete more than your plan allows. Banks love when you use your debit card. They really love when they can convince you to choose their 'Premium Plan', which allows unlimited transactions per month but sadly costs you $25/month. Let's all own bank stocks instead, collect their dividends and reap the benefits of other people's debit cards.
  • Convenience. There is something to be said for the wide acceptance of Visa and Mastercard. Even the last bastion of my cash needs, the addictive Tim Hortons has recently begun accepting plastic. No matter what you do or where you travel, you are likely able to have the option to pay with a card that you keep in your wallet, free of fees and hassle. Trips to the ATM to obtain cash have become a rare event in my day to day routine and I like it that way. Less cash lying around usually means less money going from me to merchants, not to mention less fees from transacting and, none of the dreaded 'other ATM fees' that are simply mind boggling. Let me reiterate, own bank stocks and they'll pay you the fees they make from your neighbour using the ATM at the airport.
  • Tracking. I don't think there is an easier or more accurate way to track your expenses than by using credit cards. If you want to take the opening steps of setting up a budget by tracking your expenses, just use a credit card exclusively for a month or two. Personally, I have become so accustomed to our monthly expenses that I find credit cards are ideal to use for predictability, and monitoring. If we happened to be really spending that month it'll usually come out pretty clear on our credit card statement why that is. Let's say you want to monitor how much you are spending on gasoline, groceries, or any other category; using a certain credit card exclusively for this category is an ideal way to do this. We use a card that knocks $0.02 per litre off of each trip to the pump. I like the instant savings but an added benefit is that I can actually see what we are spending on gas each month. This is great information for budgeting and managing your finances well.

In conclusion and one caveat, of course I pay my entire balance each and every month. Paying one cent of interest by not doing so, eliminates any benefit credit cards hold. For those who want a convenient and traceable access to cash with no fees credit cards are a no-brainer way to make purchases. Still, they will always be associated with financial heartache and even ruin.


Ish said...

One other benefit is points. I keep a high enough balance at the TD be waived of the highest package which includes a no fee gold travel card.

This is our first points card, and its already started to pay off in only 4 months of use.

But a key point is paying off the balance each month, the points aren't worth paying interest.

Sarlock said...

I have been using a credit card for day to day expenses (groceries, gas, bills, etc) for years and have yet to pay a penny of interest. It makes it very easy to track at the end of each month and I just drop an appopriate amount on to the card as required to keep the interest charges to zero.

There is another huge benefit to using credit cards over debit cards: Cash flow. In any given month, I float about $100 in my chequing account max, the rest I move to various locations where the money goes to work for me (paying down debt, investments, etc). For the entire month, everything I purchase just goes on the credit card... and I get an interest free loan from Visa for the month. End of month arrives, I pay off the interest free loan and a new month starts fresh.

Doing some quick math off the top of my head... if I am able to produce 0.5% interest per month with funds that I am able to invest at the start of the month while I buy everything on a credit card, at an average monthly expenditure of $2,000, it will net me around $120 per year just by virtue of using my credit card instead of my debit card. Add to that the debit card fees and you are way ahead of the game.

Middle Class Millionaire said...


Couldn't agree more. We use our PC Mastercard for everything and earn an instant 1% on all our purchases.

dividend growth said...

MG i agree with you as well. I like using plastic for my day to day purchases. If i am strict on following my monthly spending plan, why shouldn't I get rewarded with a 1%-3% cash back bonus?
And I also like the idea of limited liability if someone steals my credit card. If s.o. stole my debit card, that would have been a major hassle..

telly said...

I agree MG but the truth is, for the folks on "Till Debt Do Us Part", a credit card usually is the Anti-Christ!!!

We also do most of our transactions by Visa as well but for the few that don't allow it (utility bills, taxes, mortgage, etc) we use our LOC which carries a positive balance so no expensive chequing account fees. We used to pay $25 / mth for our chequing account until we switched to this method!

BTW, do you know what's up with Financial Web Ring forum? I haven't been able to access it for days and even tried your link to the dividend increases thread.

Jordan said...

Don't forget another plus, especially for the younger people; using a credit card for purchases, and paying it off montly is a great way to build your credit rating which can be very useful when it comes to applying for mortgages or other types of financing in the future.

Just make sure you are paying it off every month! As you stated, zero balance in the key.

DCP said...

Paying off the balance is critical. I am a firm believer that if you cannot pay your balance in full then you are in financial distress.

Doug Mehus said...

I use my Scotiabank Scene Visa for day-to-day purchases and pay off my balance every month for the same reasons as you've outlined, zero transaction costs but also every dollar I spend earns me one rewards point at Cineplex Entertainment and every 1000 points equals a free movie ticket. I'm approaching 8000 points (thanks largely due to generous bonus points when I signed up).

However, I should point out that zero transaction costs can be achieved if you don't mind banking only by telephone, online, at the ABM or POS terminals in stores. HSBC Bank Canada offers a Direct Savings Account (http://www.hsbcdirect.ca/) that offers all those features (including free banking at HSBC, BMO Bank of Montreal and credit union ABMs) plus a promotional interest rate of 4.25% until May 3rd (when it drops to 3.30%, tied with ING Direct's current offering) on your balance.

So, there are other options besides PC Financial and also the use of credit cards.

Doug Mehus

Disclosure: I work for HSBC Bank Canada.