Credit Card Myths

A really good article on credit card myths from kuro5hin. I’m publishing the complete text here.

“Credit Cards Are Expensive”

This should not be the case at all – credit cards can in fact be entirely free. I certainly don’t pay anything at all to my credit card company beyond what I actually charge on the card (plus the cost of a stamp to mail payment for the bill), and there’s no reason you should either.

There are of course some expenses one could incur through unwise use of credit cards, but these are fairly easily avoided:

• Yearly Fees: These can range from $50/year to over $400/year (for some fancy American Express Platinum cards). These may be worth it for some of the high-end cards like American Express that come with many ancillary services, but if all you want is a credit card, don't pay any yearly fees. Keep reading those offers as they come in, and you're bound to find plenty of cards that have no yearly fee. Many Visa and MasterCard issuers charge no yearly fee, and American Express's "Blue" card does not either.
• Interest: This is the biggest problem with people's use of credit cards, but is again easily avoided. Simply treat your credit card as if it were a bill that must be paid, and ignore the "credit" part of the name. When you buy things on it, pretend it was a debit card or cash, and only spend money you actually have. Then pay the bill in full when it comes, and you'll pay no interest at all.A word of warning, however: that there are some unscrupulous credit card companies with whom this is not possible. Before signing up for a card, carefully read the terms to make sure there is a "grace period" (generally 14-21 days). If there is, you can pay the bill within this period and incur no interest at all. A few cards lack grace periods; with these you pay interest starting from the date of purchase (not the date the bill is sent), regardless of whether you pay the bill on time or not. Avoid these cards.

The summary to using a credit card for free: Get a card with no annual fee and at least a 14-day grace period. Then pay your bills on time, and you’ll never pay anything more than your bill.

“Credit Cards are Insecure”

This is simply untrue. In the United States at least, there are strong protections in place for cardholders.

• Theft: Under US law, the cardholder is responsible for no more than $50 of charges made to a stolen card, even if the theft isn't reported right away and thousands of dollars have been charged in the meantime. Timely reporting can even avoid this $50, as the holder is not responsible for any charges at all made after the card is reported stolen (it's considered the responsibility of the credit card company to deactivate the account as soon as it's reported stolen). Some credit card companies, especially "Platinum" level cards, also waive the $50 and take full responsibility for any charges to a stolen card. Furthermore, the $50 only applies if you physically lose your card -- if someone steals your number but not the physical card, you're not responsible for any charges. But in any case, by law $50 is the absolute maximum you can possibly lose from a stolen card.
• Fraud: The credit card dispute-resolution procedures are heavily tilted in favor of the cardholder. Simply registering a dispute automatically puts the charge on hold, and you don't have to pay it until the dispute is resolved. The burden of proof in resolution is primarily on the charger, not the cardholder -- they must produce evidence that the charge was authorized by the cardholder, and that the services paid for were rendered. This is a notorious complaint of anti-spam ISPs (they almost never succeed in collecting on their "we'll charge your card $500 in spam clean-up fees if you spam from our account"), but it works well for cardholders. You're doubly protected online, because the credit card companies require a higher standard of evidence from the charging party in cases where they don't actually have the cardholder's signature on the transaction. If you are in deep trouble and can't seem to find the solution , perhaps this list of credit repair companies</span> will help you.

But Why Not Just Use Debit?

There’s quite a few reasons I consider a credit card, when properly used, to be preferable to a debit card.

• Fraud and Disputes: With a credit card, disputing a charge automatically puts it on hold, and you don't pay pending resolution of the dispute. With a debit card, your money has already been debited, and you generally don't get it back until the dispute has been resolved in your favor. If the disputed amount is large, being out the money for the weeks it takes to resolve a dispute may be undesirable.
• Security: If you lose an ATM or Debit card and report it within 2 days, you're covered under the same $50 limit as with credit cards. However, if you don't notice for 3 days, the limit becomes $500. There is the added security of a PIN number to balance this, but in the US at least, this can easily be circumvented with most cards by simply using the debit card through the credit card charging system (e.g. by making online orders, which generally don't ask for PIN numbers). With a credit card, you can never be out more than $50. With a debit card, you could well be out $500 if you don't notice for three days, and someone has gone nuts on newegg.com in the meantime. And, as with the disputes, there's also the issue of who fronts the money in the interim. When you report a credit card stolen, all the charges are put on hold. When you report a debit card stolen, you don't get your money back right away, until the "stolen card" procedures and paperwork are completed. So even if your liability ends up being only $50 (or $500), you could be out the entire balance of your bank account in the interim.
• Financial benefits:
  • Delayed payments: Credit cards on average let you keep your money for around two weeks before you actually have to pay for your purchase on the next monthly bill. If you make a lot of purchases, and keep your money in interest-bearing accounts until payment, this can make you, over time, quite a bit of extra interest (though moreso during periods when interest rates are a bit higher than they are now).
  • Cashback: Many credit card companies have programs whereby they give you back some percentage (usually 1 to 1.5%) of the cost of your purchases to encourage you to use the card more. If you make a lot of purchases, this can add up nicely.
  • Platinum benefits: If you have a platinum card (they're quite easy to get for free if you have good credit), they come with a number of added benefits, such as supplemental warranties for items purchased on the card, rental insurance for car rentals paid for with the card, and so on.
• Building a Credit Rating: Using a credit card responsibly for some time builds a credit rating, while using a debit card (or paying cash) doesn't. This is useful if you plan at some point to take out loans of any sort (whether to buy a car, mortgage a house, or start a business).

In short, a credit card does not have to be expensive, or put you in debt, or any of the other normally negative connotations associated with it. When used properly, essentially as a delayed debit card, it is entirely free, can have some side benefits, and gives me a greater feeling of safety – the process of “charge things on the card, then review the bill, then pay it if nothing is amiss” strikes me as safer than the process of “charge things on the card, then review the list of debits, then try to get my money back if something is amiss.”