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Lately, there has been a lot of talk about the new Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009. Since President Obama signed the bill late last week, much of the talk has swirled around whether or not the bill will harm “responsible” credit card users.
There have been quite a few good articles and posts on this topic that got me thinking about what a “responsible” credit card user looks like. Inevitably, whenever I discuss controlling spending with a cash budget or why we cut up our credit cards, I get several comments or e-mails that contain a quote very similar to:
“I can see how this would be useful for someone overwhelmed with debt or who lacked responsibility, however I just use my credit cards and pay them off every month.”
While this is an admirable financial habit, for me it doesn’t paint the complete picture. Often times, people think that paying off their credit cards in full each month automatically makes them a responsible credit card user. This blind assumption is certainly misleading and potentially dangerous to your financial life. There is a little more to the equation.
In my life, everyone who has been truly responsible with credit cards has installed a combination of each of the 3 following habits:
3 Habits Of Highly-Responsible Credit Card Users
- Pay off credit cards in full every month. I never said this was a negative habit, just that it alone doesn’t signify responsibility. This is the first and most essential habit for good reason. Letting a large balance slip for even a month or two can all but eliminate the “profit” of reward points or cashback. And everyone agrees that only paying the minimum for an extended amount of time is a surefire way to fail financially. Breaking the habit of spending money that you don’t yet have is one of the key elements of a well-orchestrated financial turnaround.
- Employ techniques to minimize increased spending due to convenience. Ah, the often denied, often laughed at overspending theory. A large percentage of credit card users simply ignore this altogether. They find it ridiculous to even consider that they might spend more due to sheer convenience or from the increased emotional detachment that credit cards foster. Responsible credit card users take a different approach. They’ve read the studies and acknowledge factors that could potentially lead to increased spending. In order to minimize them, they actively leverage techniques to keep themselves on track. They sleeve their cards, write goals in their wallets, and actively update digital budgets. They might freeze all but one card, utilize 30-day waiting lists on wants, or institute no spend days.
- Maintain control over and monitor multiple accounts. The last of the three habits is admittedly less important than the first two. However, the deeper you dive into credit cards the better you will need to be at micro-managing accounts. I know people who have 5-10 cards for different types of purchases in order to maximize rewards. While sometimes I doubt their level of expertise with the first two habits, I can’t deny they’ve mastered number three. However, often times this habit is best demonstrated by the person who sacrifices a small percentage of “return” in order to ensure the simplicity and control that comes with only having one or two cards. In general the more accounts, the harder it will be to effectively maintain control of due dates, balances, and terms of service. Responsible credit card users develop systems for handling the additional complexities that come with juggling multiple accounts.
Of course, we’ve found a really cool way to ensure we always accomplish these three habits. It involves a pair of scissors, a telephone, and an emergency fund. I’m not going to rehash the positives and negatives of cash vs. credit here, but we obviously found enough value in our lives to revolt.
People revolt in different ways, though. Some people revolt against the credit card companies by attempting to beat them at their own game. They attempt to make several hundred dollars a year by employing these three habits and following all the rules. The best are very successful. They play the game very well.
When it comes to games, I have some previous experience. I’ve traveled the country playing video games for money. I’ve played collective card games with rooms full of the best in the world. I spent years dealing, playing, and hosting poker tournaments for hundreds of people nightly.
It is no secret I have a killer gaming instinct. I go for the throat. I exploit loopholes. Yeah, I’m one of those people.
Over the years though, I’ve learn two very important lessons the hard way:
- Don’t try to beat someone at their own game. It’s not impossible to beat people who’ve spent their whole lives studying a specific game, but it’s rare to have consistent long-term success. Even if you are able to obtain a string of consistent wins, often times the price you’ve paid isn’t worth it. If I have to spend 16 hours a day studying backgammon to beat you consistently, we better be playing for some major keeps. My time is much better spent finding suckers to play my own game than studying to beat you at yours.
- No matter how often you win, eventually you have to enjoy your opponent. Sure winning is fun. At first, beating the annoying fat kid out of his lunch money might be worth it. But after the tenth time, you’d rather break the lunch tray over your head than play him again. Suddenly his $2 isn’t worth your time. Yeah, you’d play him for $10 a game, but he’s fat. He spends most of his money on food before offering to play you.
At some point during or financial turnaround, I realized that the fat annoying kids that run the credit card companies have been playing this game for a long time. Sitting in the back of the lunch room and flipping them the bird feels more liberating than you can imagine.
There are two ways to approach this. Either work diligently on incorporating the three habits above into your daily life or grab a lawn chair and come drink with me on the sidelines. Neither one is fundamentally “better” than the other, but either one is superior to being lost somewhere in the middle.
What other habits can you think of for highly-responsible credit card users? Did I leave any out? How have you incorporated them into your own lives? Your comments really do add value to the conversation. Do everyone a favor and leave them below!
Have a small limit, pay it off every month, use the advantages of the interest free periods for as long as you can, and desperately avoid forgetting how long those periods last 🙂
Multiple accounts are too scary for mine, but it can be nice to juggle cards to use the benefits of each where advantageous.
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I use Mint and have the Mint app on my iTouch. So when I am considering buying something all I have to do is check my monthly budget and see if I am “cleared” or not.
I find that method does not have me overspending with my credit card.
Perhaps it will work for others!
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That’s exactly the kind of stuff I’m talking about! Great example of going beyond simply habit number 1.
I’m a fan of Quicken. I split out the credit card bill into each category so that we can track where the money is going (instead of just a general “credit card” chunk in the budget). I download the bill as a .csv file and tinker with it a bit. At the same time, I also verify that all the charges are legit by checking to make sure there is a receipt for each charge.
We had a painful bill this month, but all legit items. Some really pricey Rx meds, glasses for our daughter, business trip expenses, etc. Paid in full, with rewards earned 🙂
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Baker, this is great! As you know I choose to avoid the credit card games completely but I admire people who have the ability to responsibly manage the use of credit cards. Rewards aren’t enough of an incentive for me to justify the risk involved. I even question the point of using credit cards when there is other means available that would accomplish the same benefits they claim they are receiving. I guess it just comes down to personal choice. I choose NO. 🙂
I love reading your stuff man! Great writing!
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I also use Quicken for my finances, as you can easily download and categorize all transactions from your bank accounts and credit cards very quickly. Highly recommended.
I find multiple cards is more trouble than it’s worth, and is a slippery slope. Quicken (or MS money or any other personal finance program) will allow you to use one card that gives you the best perks for you (ie airmiles, cash back etc).
If you pay your balance off in full on time, do you really care what your interest rate is? I have no idea what my rate is (around 18% p.a.), but since I pay on time, my interest bill is zero (excluding my mortgage and car payments)
Oh yeah, pay all your bills at regular intervals (ie the same day every month). It makes bill paying automatic. 75% of my bills are in before the end of each month, and the due dates are around the 5th-10th of each month. I pay the majority of my bills on the first of every month, and the balance on the 15th. Presto! Automatic and on time, every time.
I’m a no credit card person myself. I’ve found that it only takes a spouse that disagrees, racks up debt, then divorces you to ruin you… 4 years later, and about 6 cards paid off, I’m done! Pour me a glass of what your drinking…
I am glad some of you can handle the cards, but I pray you never have that 1 catastrophe that will take you years to overcome…
Nice article, I think I have been trying to beat them at their own game but I may grab a cap’n and Coke and meet you on the sidelines. It just seems like the safer bet.
Unless my spending can all be funneled through the credit card for rewards (most of which is monthly bills and can’t be) I don’t think I can get ahead.
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I just hate giving the Credit Card companies my money any more than I already have but I found a loophole that eases my conscience (although Visa still gets it’s share). I get rewards on my debit card when I use it as Credit. The Fargo gives me points for doing this that I can turn into cash, it’s not much but I absolutely feel like I’m beating the man every time I redeem some more points and send it to my latest snowball account.
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One of the reasons I’m a big fan of Mvelopes is that if we do spend anything on our credit cards, it automatically gets taken out from the appropriate envelope.
That means there’s no danger of buying 25-50% more just because we’re using a credit card (which is what I was always afraid of). We’re still tied to the same envelope limits no matter what and must exercise good judgement when using our cards.
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It is just too easy to whip out the plastic and pay for whatever it is that I need to pay for. I got myself into some trouble recently and am climbing out of it as we speak. It really is a daily journey. I like to think about the movie What About Bob? and his idea that it is all about “baby steps.” It really is amazing how quickly little cutbacks–and most importantly stopping spending more–really can change things quickly.
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First, I enjoyed the article. Maybe it’s because I’m a “responsible” card-holder but I’ve never considered a cc card “just a piece of plastic” w/little financial emotion attached to it…to be honest I doubt that most cc users that pay their balance off at the end of each month do. It probably more likely feels less than spending actual money for those who only pay a portion of the bill each month.
I know you mention in the article that most cc holders spend more on credit than they do with credit/cash (and I’ve heard this statistic many places), but most also carry a balance; what I would be more interested in is the statistics of those that pay the balance, on whether or not they spend more w/a cc than debit. It’s those that think of cc’s as “just a piece of plastic” that get themselves over enough that they can’t pay the balance.
If anything I, and most I know who pay their balances are the opposite. I know I have to pay a lump-sum twice a month (I pay half the bill w/each paycheck) so I am even thriftier, because I know I will have to look at that large bill and if “feels” like I’m already spending more when I have to do it in full. W/out trying to sound snooty (I’m only 25 and make less than 30k /year so I’m far from being a Snooty McSnooterson :)) I think that many of us that are conscious enough to pay the balance off are conscious enough to have a mental monthly limit of what we are willing to spend, or can afford without needing to too many tools or goading to reign in the cc spending. I use my cc for everything…I barely remember my debit pin. I don’t touch my income except to pay off the credit card, so to me my cc is like cash.
And if you can pay the balance off each month, what parameters are there then to say that one is “spending more” than they would w/cash? People speak of the “convenience” of plastic, but isn’t debit just as convenient? If I’m spending more money it’s not because I’m using a CC, it’s because I wanted whatever it was I bought, and I can afford it. Spending more is only an issue if you don’t have the money to spend which is why I disagree with the popular idea that one spends more w/a cc, at least not when it applies to those that pay off the balance.
To me I would spend more with cash…snack machines, tips, people borrowing…or begging etc etc; more places take cash than credit or even debit…CASH is more convenient.
Ha! I reference What about Bob often, saying “Baby Steps” in Bobs quivery voice, the part where Bob is trying to leave his apartment feels like me and my finances….
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First, The article was great.I was wondering if I could put some links out to it.
I am one of the few that pay their card off every month.The way I do it is like this. I go to the store and spend 12.45 on my MasterCard. I immediately go home and transfer 13. Dollars into a special account.I continue this until it’s time to pay the bill.Simple!
And yes,you can beat someone at their own game.Simply because they will get cocky,and that is when you make your move.
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