Careful use of credit cards
May 14, 2009In the last few weeks Kiwibank have been pushing debit cards hard. Debit cards are like an ATM card for an ordinary bank account with a number that works for online credit card transactions, so you can use them to buy online and the money comes from your account balance. They do have some handy features, but I won’t be getting one.
I use my credit card to wring a little more interest out of the bank. I put every regular expense I can on my credit card, and then pay the card off in full, so that my money is earning interest in a savings account while I am charged nothing for the credit card. There are no electronic transaction charges for my credit card either.
My main credit card has a very small limit, so I can’t really get into trouble, either by overspending, or by fraud. I’d prefer not to have my bank account cleaned out by a dodgy online store, thanks. Whereas although I don’t usually keep large amounts in my main transaction account, there’s a small window around payday when there’s more than usual in there.
I think that if you were going to get a debit card, it would be best to have it hooked up to just one account, and to not put money in that account unless you’re actually planning a purchase.
Got any cunning credit card strategies? Thoughts on debit cards?
Che Tibby
Stephen
Frugal Me 
I have a debit card now, and I don’t use my credit card any more. All my monthly bills are paid by direct debit from one bank account, while I have another account hooked up to the debit card.
I use it for paying for big purchases when I’m out and about, and also online purchases.
Somehow it makes me more careful with spending when I know it’s real money that’ll be disappearing from my bank account, and not just a la-la-la-happy credit card transaction.
I’m with Robyn on this one. Yes, if you use a credit card responsibly and do everything exactly right, you end up ahead on the deal. But most of us won’t. If you’re one of those people who uses credit cards in an incredibly responsible and careful manner, congratulations; experience has shown me that despite my good intentions, I’m not one of those people. I cut up all my credit cards four years ago, and I’d have to have some very very specific reason to get another one. Thankfully, I didn’t dig myself into a hole I couldn’t get out of – but I did go deeper than I’d really like.
Seriously, I think about half of my financial planning is based on psychology rather than interest rates. The zippiest financial feature in the world is no bloody good to me if it comes with a tempting lure attached that I will, in a moment of weakness, succumb to; hence, I deliberately curtail a number of possible financial avenues because I know that they simply wouldn’t work for me.
Look at it this way: credit card companies do all this stuff because, in the long run, they make more money by suckering more people in. If you’re very disciplined, you can game the system and end up doing quite well. But the hard, provable fact is that although we all think we’re giong ot be that disciplined, the vast majority of us aren’t. I prefer to remove the possible temptation.
YMMV, obviously.
Plus, my tattooist only takes cash.
You have the credit card thing down well.
Pay the balance in full every month and be careful of going over your limit- the over-limit fees can kill you. Be sure there are no strange charges on your statement and then shred it. No shredder? Tear off the account number (it usually appears in two places) and flush it.
Your advice is on debit cards is good but can be a bit inconvenient. It’s a personal choice, of course, but I prefer to have some money in the account for day to day expenses that I don’t want to put on my credit card. Your liability for loss is higher but if you report unauthorized charges quickly you should be fine. Check balances on-line at least weekly.
Tom Mahoney, Director
Cardholder911.info
when i got my first debit card around 15 years ago, i thought it was the most brilliant idea ever. i wish my parents would agree and stop clogging up the checkout lines with their check-writing.
in all that time, i’ve only had fraud occur once… about two years ago. the bank notified me of a suspicious charge immediately and took care of it from there, though i never received a satisfactory explanation of how on earth it happened. they have also contacted me when i had trouble with several gas pumps in a row, just to make sure everything was kosher.
I like your strategy of keeping money in an interest bearing account and then using that money to pay off your credit card in full each month. Some credit cards, such as Citibank cards, even allow you to link your savings account to your credit card so you make payments directly from your savings account, instead of having to transfer from your savings to checking to pay off your credit card! That earns you a few more extra days of interest.
If you’re able to link up your credit card directly to your savings account, then another useful tip is to take full advantage of your credit card’s autopay. Hopefully, your savings account has some padding in it, so you won’t necessarily have to depend on your pay check being deposited before having enough money to pay your credit card.
For some people, such as previous commenter Robyn, debit cards are a financially smarter way to pay because they feel more responsible using it. A lot of people can get carried away spending “other people’s” (i.e. the credit card issuer’s) money, resulting in overspending and an inability to pay. However, if you can practice restraint and use credit cards only for necessary purchase you can pay off each month, I still recommend credit cards because they’ll help you build credit. Debit cards will not!
However, if you have bad credit and are unable to get a credit card to build credit, then by all means, yes, get a prepaid card and look for ones who have programs to build your credit, too. They may cost you money each month, but the positive credit history is well worth it and the money you spend on these fees are nominal compared to what you’ll save in the future with good credit.
So long as you remember it’s your money and not some virtual money you’re spending (you up to 55 days from now is still you, right?) opting for a credit card is a no brainer. You get cashback at the end of the year (1% off what you spend ain’t bad), earn interest on the money until you pay the balance, no transaction fees… it’s a pretty sweet deal really. If you go for the gold card option you even get free travel insurance.
Justine and I got a pre-approved offer for a platinum card a little while ago, which shows how badly the standards have slipped at Visa. From what I could tell, though, the only discernible advantage (in exchange for much higher yearly fees) was the promise that doors would be opened for us by somebody wearing white gloves. Good during a flu outbreak, but not much else. Also, I think there was some expectation that we had to play golf at some time or other, and I just couldn’t stomach that.
i use the same method, except… i’m hopeless at remembering when the due date is. so i just give it a couple of weeks then pay it off.
that’s why direct debit is fantastic – the bank remembers for you on the due date. Of course, you still need to remember to put enough money in the account the direct debit is coming from…
Curious – it seems this post has been picked up by some American-based money-related blog.
I suspect that what Americans think of as a debit card, we think of as an eftpos card, with a NZ debit card being an eftpos card that also lets you use it for online purchases, like a credit card.
And this in turn reminds me of a recent interview with Suze Orman in a NZ publication (the Listener, perhaps). It ended with a note that Orman didn’t recommend her latest book for NZers as it was written for the American financial/banking system. So not all money advice flows between borders.
Yes, I’m also not sure about the relevance of “building credit” in the NZ environment, where we don’t have anything like FICO credit scoring, or such an ingrained assumption that big credit lines are a good thing.
I’ve asked my bank to pay my credit card off from my cheque account every month. The card exists purely for convenience’s sake (rather than as a line of credit per se) so going overdrawn is never an issue. That said, everytime I read a mefi thread about how dreadful credit cards are, I’m encouraged to pay it off pre-emptively.
If you expect to always pay your monthly bill in full, your best choice may be a credit card that has no annual fee and offers a longer grace period.