Money Saving Idea - Use Credit Cards Responsibly
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A recent USA Today article suggested that for 2012 people look to save money by using cash instead of their debit or credit cards. The idea was if you use credit cards you are more likely to spend more then if you used cash. The second suggestion was if you use cash instead of a debit card you could avoid potential overdraft fees. A third point was if you pay cash at “many stations” that you might get a discount of as much as 10 cents a gallon off the credit card price. I'm here to tell you that credit and debit cards when used responsibly can be great tools to save you money. Let's take these assertions point by point and see if this makes sense.
The first point the article raised was if you use credit cards you are more likely to spend more then if you used cash. Certainly there have been valid studies that show this to be true. So why would I still suggest using credit cards instead of cash? The answer is free money. What I mean is there are two possible advantages of using a credit card versus cash for a purchase you were already going to make. (That is the key to this whole thing, only use credit cards for purchases you were already going to make.)
The first advantage is many credit cards offer very low interest rates for new cardholders. A great example is Citigroup (NYSE: C) has been sending mailer after mailer to potential customers offering 0% interest for somewhere between 12 and 24 months! Many of these offers are for purchases or balance transfers and the purchases incur no up front fee. So literally Citi is saying, we'll give you a credit card and if you use it to make purchases you'll pay no interest for 12-24 months. The best way to use this to your advantage is every time something is charged to this card put the exact same amount of money in a liquid savings account. This assures that you won't spend the money twice. You also have a way to pay off the card in full and you earn interest on your funds while they sit.
The second advantage to using many of these cards is they offer rewards points or cash back for purchases. So if you use their card you pay no interest while earnings rewards points at the same time! A good example is let's say a family of 4 spends $4,000 a month on purchases they could charge to a credit card. Using a card with a 1% cash back feature like Discover (NYSE: DFS) this family will save at least $40 a month just from the cash back. Since Discover offers different categories during the year with 5% cash back they could earn even more. Shopping through the company's web site is another way to potentially earn more. Going to Discover's site and then clicking through to different merchants can increase your cash back to 10% or more.
The second idea of not using a debit card to avoid potential overdraft fees is uninformed. Every bank must give their customers a choice about how their debit card transactions are handled, it's the law. Specifically every bank must offer the customer a choice to opt-out of having their signature based transactions considered for overdraft. In plain english you can tell your bank to opt-out your card and if you sign for a transaction (not entering your PIN) the bank is required to reject that transaction if you don't have enough money. The only reason this would not work is if you had outstanding checks clearing at the same time. The bottom line is overdraft fees are a choice not something that just happens. Keep a check register and pay using your debit card. It's safer then carrying cash and you are normally 100% fraud protected if something goes wrong. If you lose a wad of cash there isn't anything the bank can do for you.
The last point about using cash at a gas station and “many stations” offering as much as 10 cents off a gallon doesn't make tons of sense. If you think about it, with the price of regular gasoline at about $3.30 a gallon, a $0.10 discount equals about 3%. There are many gas and major credit cards that offer at least a 3% cash back or discount. I can't see why I would want to use cash when I can pay at the pump.
So the bottom line is, if you use credit cards and debit cards responsibly they can save you time and money. Credit cards in particular get a bad rap, but if you have decent credit they can be a valuable financial tool.
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