Don't Cut Up Your Credit Card! But Your Debit Card...Maybe

Why do people think they've made some sort of major accomplishment by cutting up a credit card? They still owe the debt that they probably accumulated on it. The account is still active. They can still use the number.

This "cutting up your credit card" nonsense is the exact kind of advice that the so-called experts give to young people. In their usual condescending way, they think that young people just don't have the ability to resist the temptation of maxing out their credit cards buying drinks for strangers at a bar. For the millions of you who actually do know how to control your spending, you should consider never using your debit card.

Many people think that using a debit card is much more responsible than using a credit card. I think they're wrong.

For people who have no credit card debt, you should almost never use a debit card. First and foremost, you are much more likely to avoid a nightmare with a credit card if there is any fraudulent activity.

Fraudulent debit card use can wipe out your entire bank account. While the legal limit for fraudulent use for most cards is $50, your bank might take up to 10 days to investigate the fraudulent use before returning the money into your account. By that time, you might have written rent, utility, and other checks that you are now bouncing, leading you to excessive late fees and overdraft charges. The bank might also decide to further investigate, leaving you without any money for quite a bit of time.

While you might not think this could happen to you, identity theft and debit card fraud happen more often than you might think. With fraudulent credit card use, you will discover the fraud before a penny is taken out of your bank account. When you dispute the charge to the credit card company, it is immediately taken off your bill until the investigation is complete. The burden of proof lies with the credit card issuer, not you.

But safety aside, there are some of the many other advantages of using a credit card over a debit card:

1) Earn rewards.

Whether it's frequent flier miles or cashback or money for charity, credit card issuers routinely offer a rewards program for using a credit card.

2) Build a credit history.

Using credit cards and paying your bills allows you to increase your credit score, allowing you to get lower interest rates for student loans, auto loans, mortgages, and more. (Debit cards can't really help you with this.)

3) Protect yourself from scams or defective products.

If you buy something that was not defective and the merchant accept your return, tell your credit card issuer, and they will investigate. If you're found to be right, they will withhold payment to the merchant and you won't be liable for the charge. This is especially important when purchasing something online.

4) It's a free loan.

Charging your purchases on a credit card allows you to earn interest on your checking account balance, since you get an interest-free grace period between the closing of your statement and your payment due date. Debit cards, on the other hand, take money out of your account immediately.

While debit cards might have a little less paperwork to deal with, most of us -- especially people who pay off their balance every month -- are far better off swiping a credit card.

Coffee is Not the Problem, Interest Is

Why do people seem to think their financial troubles are solely due to their Starbucks habit? Personal finance gurus love to talk about how making coffee at home will somehow allow you to retire 10 years earlier. Some coffee quitters are so proud of themselves that they want to spread their gospel -- one of these students was so proud of their genius that they made a coffee calculator.

The media likes to blame young people for their financial struggle, as if we are so self-involved and irresponsbile for accumulating debt that we forget to pay our rent because we're addicted to coffee.

When talking about one young person in debt, one journalist writes:

Serves her right, you think? Many twenty- and thirtysomethings raised on MTV and InStyle magazine have tried to mimic the glamorous lives of the rich and famous through the use of credit cards. (MSNBC, February 8, 2006)

But the truth of the matter is that tuition, housing, and life in general is far more expensive than it used to be, and most of us never really learned how to deal with it.

This culture of self-loathing for buying a pair of jeans or a sandwich for lunch is only making matters worse. I've seen people move in with creepy strangers to save on rent or become hermits in order to spend less. But for plenty of young people, you can take control of your debt without really changing your lifestyle.

As of 2001, the average credit card debt of an American aged 25-34 was $12,000. This number is sad, but not because people are spending too much. The problem is getting trapped by credit card interest and finding it impossible to dig yourself out of the hole. Thousands, maybe millions, of Americans are accruing more debt in interest than from new spending.

So if you have credit card debt, spending might not be the problem. In my first post, I talked about someone with credit card debt and student loan payments. One of his many mistakes is making extra student loan payments instead of focusing on the credit card debt.

Here are a few tips on getting rid of credit card debt:

1) Take advantage of a 0% Balance Transfer Offer
A fairly easy to obtain way to buy some time to keep yourself afloat is to transfer your credit card balance that is accruing a lot of interest to a card that will charge no interest for 12 or more months. This is a great way to attack the debt, and if you aren't finished within 12 months, you can transfer the debt to another 0% card!

If you don't qualify for a balance transfer, you can probably move your debt to a card with a low introductory APR to reduce the burden of interest piling up.

2) Focus on the right kind of debt
When attacking debt, prioritize your payments first on the highest interest rates. Don't make advance payments on your student loan payment or mortgage payment if you have credit card debt. Interest rates on these loans are lower and the interest paid is tax-deductible. Pay the minimum on these loans until you can erase your credit card debt.

3) Never miss a payment
Missing a payment can have really negative consequences on your credit history, and it automatically tacks on fees and high interest rates for most credit cards. If you are a forgetful person, consider a credit card that automatically deducts a certain amount of money from your bank account.

While giving up bad habits is always good, don't deprive yourself of things you enjoy when you might be able to manage your debt by transferring your balances and minimizing the impact of high interest rates.

Here is a list of cards that offer 0% Balance Transfers for 12 months.

Now stop thinking about moving to a sketchy place on craigslist and find a new credit card that will let you conquer your credit card debt. Do the math, you might just be able to afford an overpriced latte more often.

Share on Facebook

Choosing a Bank: ATM Fees

Americans pay billions of dollars in ATM fees every year. When you use an ATM that belongs to a different bank other than your own, the law permits your bank to charge you a fee AND the ATM owner to charge you as well.

In 2006, the average surcharge assessed by ATM owners climbed again. Add in your bank's surcharge and $20 withdrawal to get some cash for a cab ride might cost you up to 20% extra in fees ($2 from your bank and $2 from the ATM owner).

This practice made enough people angry that some cities and states tried to ban ATM fees altogether. (I actually disagree with banning ATM fees, since they have given incentives for banks to create more and more ATMs all over the world, giving us easy, 24-hour access to our money.)

But then again, I don't pay ATM fees. Ever.

ATM fees are just one of many considerations when choosing a bank, but for many people, it is their primary consideration. For some reason, our instinct is to choose a bank near our home or work, so we can withdraw money without paying fees. While this is fine for some people, wouldn't it be better if every ATM was your bank's ATM?

Since I started college, I skipped opening an account with Bank of America (check out Bank of America's outrageous "ATM Denial Fee") and the other local banks around campus. Instead, I went with UmbrellaBank, an internet bank. Their policy on ATM fees: customers never pay them. Not only does the bank not charge any ATM fees, but they automatically reimburse you when you incur a fee from the ATM owner.

This is a very common feature of internet banking, and it allows you to never have to think about which ATM to withdraw from, since you never pay a fee to get your money. Even some "brick and mortar" banks with actual branches are offering promotions to reimburse your ATM fees.

Deciding between a "brick and mortar" bank and an internet bank can be tricky. I'll discuss the considerations in making this decision in a future post. But if you have a bank that charges ATM fees, get rid of them.

Share on Facebook

Financially Illiterate

There's something bizarre about our society that we don't seem to realize is a problem. Smart, educated college graduates starting their first job seem to have no idea how to approach some of the most basic questions of financial survival. And some of them never seem to figure it out.

I asked a recent Harvard graduate living in New York about his financial life:

Annual salary: $70,000
Credit card debt: $4,000
Monthly student loan payments: $250

He's just gotten a new job that pays better, and he is looking to find a place on his own. He's decided to opt for the best health, dental, vision, and life insurance plans through his employer. He's also looking to pay down his debt, so he's only using his debit card. In addition to paying down his credit card (which has a 19% APR), he's also making extra student loan payments so he can erase his student debt.

He wants to try and find a place to buy after a year, since he hates throwing money away on rent. He's going to save 15% of his income each month in a Bank of America money market account so he can have a small downpayment within a year or two.

The funny part about this story is that most people would think he's making all the right moves. Paying down debt, saving, getting good insurance, and even making a potential home purchase. The sad part is that many (actually, most) of these decisions are wrong. They are the result of conventional wisdom, rather than real financial savvy.

In subsequent posts, I'll talk about the factors that one should think about in their financial life, like the decisions the person above makes. Saving, investing, taxes, insurance, renting, buying, loans, credit cards, and more.