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Credit cards vs. Cash, for the long run


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#1 Just_One_Question

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Posted 20 April 2017 - 05:58 PM

This topic was spun-out from a previous comment of mine in the General Security sub-forum


Why do people even pay with credit cards? In my country such cards have really become mainstream these past couple of years and you can too, like in the USA & Canada, see people getting paid their salaries in cash relatively rarely. However, I don't understand why do people pay everything with them, such as hotel stays as suggested by the article for example, and not just draw money about once a week from an ATM and then using the cash? Is such thing only possible with debit cards and not by credit cards? I recently opened my first bank account at Societe Generale and they gave me a debit card. What I do is to draw the cash from one of their ATMs (for no fee) once a week and then use the cash. I understand that in America it's more complicated, because people want to use their credit and not debit cards more frequently, since they want to have a good credit score - they want to establish a trustworthy relationship with their bank and hopefully further down the line to leverage that trust in order to get a lower interest on a bigger loan, such as a mortgage. However, I don't get, wouldn't your bottom line be worse off even if you manage to get a mortgage at favourable rates, because you paid so many years monthly interest on your credit card bills beforehand and also all those transaction fees for every single purchase? To put it mathematically:
Future discount with good credit score on a mortgage < Credit card interest bills & transaction costs throughout your history in establishing your good credit score, no?
I am sorry if this is a potentially silly question. Nobody in my family's history has ever taken out a loan, so I am not all that familiar with the subject. I just think that carrying a debit card and only using it to draw relatively small sums of cash from a bank-owned ATM is both the cheapest and the safest way to operate with your operative funds.:)

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#2 britechguy

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Posted 20 April 2017 - 06:33 PM

The convenience of not having to deal with cash cannot be overstated as far as I'm concerned.  Not to mention that the only way to build a credit record is to start small, and it's generally possible to get a credit card with a relatively low credit limit and use it as a way to build your credit record.

 

I don't use my credit cards for credit in the conventional sense, but as short term loans on which I need pay no interest.   I have been consistently paying off my full balance every month since I started using credit cards.  Though the credit card companies hate folks like me because we're the lowest profit users those who look at creditworthiness find my style to be one of the most attractive.

 

Also, credit card credit scores are useful no matter what lender you might choose to get a conventional loan like a mortgage from.

 

Although I always keep a small amount (under $100), usually far under, amount of cash for purchases where cards can't be used or I'd feel stupid using one I do pretty much all other purchasing using plastic.


Brian  AKA  Bri the Tech Guy (website address in my profile) Windows 10 Home, 64-bit, Version 1709, Build 16299

       

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#3 mjd420nova

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Posted 20 April 2017 - 06:33 PM

My saga began in 1974 and as a result of bringing onto this world and raising four children, the credit card balances totaled over $35,000.  USD by 1994  At $1,000. a month, I was able to pay it all off in three years.  I have not held a credit card since.  ATM cards were good until my bank (initials are WF) decided to conduct creative accounting and violate mathmetics rule of the order to conduct formulas.  M D A S   Multiply  Divide  Add  Subtract.  IN THAT ORDER, but no they want to do all the withdrawals first and then access overdrafts before adding deposits.  BYE BYE BANK.  I use a credit union now and glad to have left that nightmare behind.



#4 Just_One_Question

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Posted 20 April 2017 - 06:56 PM

Very interesting! Thank you for your answers.
I still don't get though, if you pay off your credit card bills at the end of every month and treat them basically as a cell phone bill, what's the advantage of a credit card over a debit card? Doesn't the former carry more risk as it has late fees if for one reason or the other you don't manage to pay off the monthly bill, whereas the debit card can only go to 0 and at absolute worst you would owe the bank a couple of bucks/month for sustaining your bank account (for which your debit card is a de facto electronic key)? I guess what I just wrote is true in theory, but in practise pretty much everyone would eventually apply for a morgage loan and a prior build-up of a good credit score would come in handy. So in the end probably the best 'system' is to do what Brian is doing - to use a credit card instead of pure cash or a debit card, pay it off at 0% interest every month and be wise with your spending so as to develop a good credit score for a bigger future discount. This way you basically pay the transaction fees for convenience of use and you also assume the risk of going into debt and possible late fees in order to get a more sensible loan rate further down the road.
Damn, I'm actually curious now what kind of rate would an average bank quote me, for a mortgage for example, if I just randomly pop up and apply for one, having a regular job with a regular pay-check and never having taken credit from anyone, for anything before.:lmao:

#5 TsVk!

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Posted 20 April 2017 - 07:47 PM

My habits mirror Brians

 

I've been using a credit card for all my transactions for years. I just have it set to auto-pay the balance on the due date every month. That way I avoid all interest charges.

 

I am still being paid interest on the money in my other accounts. So in fact the bank is paying me to to do it like this. The vendor pays transaction fees in Australia, no problems for me there... Added credit rating is just a bonus.

 

The other advantage is I can see where I spent all my money. There's not the "where did it go?" feeling like before when I used cash. This way I can also spot places where I am wasting money and stop those behaviors.

 

I'm not materialistic though and I rarely spend anywhere near what I earn. For people who buy "stuff" and do "things" this methodology might not work out so well, they may sink into debt.


Edited by TsVk!, 20 April 2017 - 07:49 PM.


#6 Just_One_Question

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Posted 20 April 2017 - 08:21 PM

I'm not materialistic though and I rarely spend anywhere near what I earn. For people who buy "stuff" and do "things" this methodology might not work out so well, they may sink into debt.

Thank you for your reply! Yes, having the illusion of operating with 'infinite' financial resources sure does stir up one's imagination, considering how many bubbles were created in the American economy these past decades, to which frivolous spending contributed greatly.

I don't know, I just can't shake this feeling of anxiety when I think about making purchases on credit. In my mind debt is a tool used mostly for expanding a business and investing in your home equity. But I guess I will probably change my view once I realise that as long as you remain mindful, you can make a credit card work in your best interest.

Edited by Just_One_Question, 20 April 2017 - 08:23 PM.


#7 TsVk!

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Posted 20 April 2017 - 08:34 PM

Just use a debit card for a while then. If you find you are going bust towards the end of your pay cycle have a look at your spending. See where the money is going... that's the beauty of using a card.

 

Once you find you manage your finances just fine without having to check your balance constantly you can graduate to a credit card.

 

Then at the end of every pay cycle you can deposit whatever's leftover in addition to your normal savings account deposit, and then start again with the same amount of cash every month.



#8 britechguy

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Posted 20 April 2017 - 09:00 PM

In the end, one must know and understand one's own needs, wants, and proclivities when it comes to using credit cards.

 

If you are someone for whom "it's not money" unless it's cash then credit cards are an almost sure road to ruin.  I was never one of those people.  Whether it's cash, check, or credit card I am acutely aware that I am spending, so there's no risk of going wild because I'm using plastic rather than one of the conventional forms of paper.

 

My anxiety comes only when I'm spending either what I consider to be unjustifiably frivolously or "beyond my means," which almost never happens because who wants to be anxious about buying something that, at least in theory, should bring one joy (and I am not talking about day to day sundries, here).  And that comes no matter what the spending mechanism - it's tied to the release of the money itself.

 

I am very lucky in that I am not a "thing person" and, in fact, have come to dislike the accumulation of things more and more as I've gotten older.  I've purchased things that I really wanted, and some of them big ticket items, but there have been very few of those.  I am not influenced by what other people have or what "the world thinks I should want."  What I want I want and what I don't I don't and it's well-nigh impossible to make me want it.


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#9 KeturahWeston

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Posted 20 April 2017 - 10:10 PM

When traveling I use my credit card but in paying minimal amounts for our regular family expenses , I just pay in cash.



#10 Just_One_Question

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Posted 21 April 2017 - 07:49 AM

Yes, all of what you've said is true. I suppose, since I am actually pretty good with my finances, I will get a credit, instead of a debit, card when I move to the USA, purely as a way of building a respectable credit score.

Some last questions I have, if you don't mind.

1.I've always wondered, does it matter how many purchases you make a month with your credit card when it comes to building a good credit score with it, or is the only metric that matters that of whether or not you pay off your monthly credit card bill every month?
2.Are you allowed to substract cash from a credit card via an ATM as you are with a debit card or are there some great limitations to doing that, such as high fees, etc. ?
3.What is considered a regular EAPR for a credit card? What is yours? To put it simply, out of all the purchases you make in a given year with your credit card, what percentage of that sum do you ultimately pay out to your bank? ~10%?
4.And also, finally, a bit of trivia: Is the American Express Centurion Black Card cosidered the most exclusive one, as a status symbol, among all credit cards in the USA? I've heard this on TV, so this is why I'm just curious.
Centurion-Card-1.jpg

I apologize that I have bombarded you with questions which are probably self-explanatory. I am really new to this game - like I said noone in my bloodline has ever applied for a loan, it's a relatively new concept to me.
Thank you!:)

#11 britechguy

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Posted 21 April 2017 - 10:30 AM

1.  It's not a matter of the number of purchases, per se, but of the amount of money you churn through, usually over time.  If you make 100 purchases at $1 (unrealistic, I know) that's still only $100 involved, total, and virtually anyone who's employed in a job that pays a living wage can pay back $100 with ease, and will.  That doesn't add much to your creditworthiness score alone.  However, if you buy a $1500 flat screen TV, and pay that off the same month, that tells credit issuers something (or at least they think it does) about your overall liquidity.  If you're trying to build a credit record, and you know that you will be consistently paying off your balance each and every month, I would use the credit card for every possible transaction at every possible opportunity.  These days places like McDonalds take credit so, if you're trying to build a credit record, buy that Happy Meal with your credit card, not cash.

 

2.  Don't know about from an ATM, as I've never attempted to do that with a credit card.  I have debit cards that double as ATM cards, but I don't even use the ATM often.  If I'm looking to get cash back I generally use my debit card at "The Bank of Wal-Mart" or "The Bank of Kroger" or the like, taking cash back at the end of the transaction.  I've been known to buy a single item mainly for the purpose of getting cash back.

 

3.  I pay zero attention to this because if you pay off every month it's irrelevant.   If you happen to forget to do so on a given month, after you've been doing so consistently for years, I have yet to have a card issuer not agree to waive the fees and interest if I pay online and then call them promptly.  There are certain life events (e.g., deaths in the family) that can throw anyone's concentration every once in a while, and credit card companies know this and don't want to upset their consistent "pay it off every month" clients by getting nasty on the rare occasion where it happens.

 

4.  At one time the American Express Black Card was the one and only "no limit" card and could be used to do things like buying $500K cars and the like.  It was, of course, only issued to the most creditworthy and wealthy of clients.  Others have followed suit.  This is another of those "I couldn't care less" things because I have never been in the income echelon where a Black Card or its equivalent would be issued to me, nor would I want to be charging things that one would normally take out a long-term loan of some sort in order to buy on a credit card.  The interest on credit cards is routinely in the double digits, which is an insane rate to pay, and how those who are not careful and build up huge balances end up getting themselves caught in an eternal cycle of debt because all they're touching with the payments they're making is paying off interest and never coming close to touching the principle.


Brian  AKA  Bri the Tech Guy (website address in my profile) Windows 10 Home, 64-bit, Version 1709, Build 16299

       

    Plus ça change, plus c'est la même chose
              

 


#12 Just_One_Question

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Posted 21 April 2017 - 11:18 AM

Thank you so much, Brian. That was very educational!
I swear this is the last time I delve with a question into this topic. What is the point of your bank to have you as their credit card client, since you consistently pay off all your dues to them every month at 0% interest rate? Is their profit from you entirely based on 3 things - you buying more things and contributing to the whole economy of which the bank is part of; spreading 'the good word' around since I get the impression that you are content with your relationship with your bank/s; and of course the transaction fees? Am I missing something else?:)

Edited by Just_One_Question, 21 April 2017 - 11:23 AM.


#13 britechguy

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Posted 21 April 2017 - 11:39 AM

Having been "on the other side" [the merchant side] of credit cards at one point in the past I can tell you that the arrangement is such that the banks/processors get a per-transaction fee [flat rate, it was 10 cents for credit and 25 cents for debit back then] plus a percentage of the amount charged.  Since all businesses build in these amounts into pricing spread over all their sales, whether those sales are cash or credit, there is no point in my paying cash since it gains me nothing.  It's been that way for decades now.  I also earn cash back on one of my cards (which is, of course, earned via the merchant and that ends up being built into pricing).  There were stores at one time that made it a point that they would not take credit and claimed to have lower prices as a result.  Virtually all eventually went out of business or started accepting credit because credit transactions are routinely well over 50% of your sales and the price differential you can achieve by not accepting credit is quite small, not nearly enough for most people to forego the convenience of paying with plastic.

 

The banks/issuers are quite happy to get more of those fees and percentages even though they'd love it if I carried a balance and gave them interest, too.  But that's not going to happen.


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#14 mjd420nova

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Posted 21 April 2017 - 01:36 PM

The question of what type of card to have comes up often  Credit, Debit(atm) or prepaid.  I have seen some places use a disclaimer and charge an extra 35-45 cents.  Now most gas stations charge from 3 to 10 cents per gallon for a card and cash is cheaper with no fee or extra per gallon charges.  The rest of retail makes no extra charges, just boosted prices everyone pays.



#15 Just_One_Question

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Posted 21 April 2017 - 04:54 PM

Oh, that was a very important piece of information. I didn't realise that these cuts were being paid by the stores to the credit card companies & banks, so ultimately the merchants account for them in the pricing of their goods, thus eliminating the potential advantage of cash payers over credit card customers.
So in the end, if you are wise with your spending, you can get a credit card and for a small fee in the neighbourhood of ~1% on all your purchases per year (accounting for cash-backs and different discounts in some shops) you get, as compared to cash, more security (although less privacy, but this is a different topic), bigger ease of use and most of all a good credit score, which will provide you with a much bigger discount on a future debt purchase than the ~1% per year in fees and charges which you have paid in the past. Nice!

Thank you both for all your help, all is clear now!:)




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