Thursday, February 11, 2010

Plastic Debt

Like just about anything else, credit cards can become a problem if they are abused. And just like I would recommend avoiding alcohol or gambling if you have a problem controlling it, I'd recommend avoiding credit cards for the same reason. But, just like most other vices they aren't evil in and of themselves.

The Wealthy Barber suggests avoiding credit card use altogether. Which is probably the safer route to take for the general masses. If you aren't doing well at tracking how much you're spending then this might be the way to go. After all if you are spending cash you can watch your account balance to see how much money you have left at any given point.

I heard some great advice a few months ago. A credit card should be considered a method of payment and not a method of finance. So whether you pay by cash, debit card, or credit card you shouldn't spend more than you can afford to. If you do that than it really doesn't matter how you pay and it just becomes a method of payment.

I'll talk about borrowing money sometime in the future, but I think you already know that 19% is a bad deal. So if you do need to finance something, look elsewhere. Heck, I'll even give you a better rate than that. ;)

For any of this to work, you don't want to carry a balance on your credit card. So when the bill comes in pay it in full. Which should be no problem if you stick to the budget you created.

So if you can afford to pay cash, why would anyone use a credit card?

Well besides the convenience, and the ability to shop online, you can also earn rewards probably faster than any other rewards program. Everything from free gas to mortgage payments to trips around the world.

These rewards can add up quite quickly if you use your card a lot. In fact I put everything I can on to my card. I just recently switched over most of my bills to the credit card just to increase my points. If I get a student loan or a bursary, I still put the tuition on my Visa and then use the loan amount or bursary to pay the Visa. I'd throw my mortgage on there if they'd let me, but they don't seem to like that for some reason. ;)

I used to avoid annual fee cards like the plague too, but now I welcome them. I pay $20/year on my card which doubles the points I collect. For each $100 I spend I get $1 in bonus dollars. Without the $20 fee I'd have to spend twice as much for the same benefit. That extra $20 will get me about $250 in bonus dollars this year, so well worth it.

Now there are lots of bonus cards to chose from and I thought about writing a posting on that as well, but I have decided against it. I'm using the Desjardins Visa myself and I use the bonus dollars to go into an RRSP. It has a better return on the points for this than any of the others I looked at. I contemplated an Air Miles or Aeroplan Card, but I didn't like the restrictions (limited airlines, dates/times, etc). The flight cards might work out better money wise, but I'm happy with what I'm getting. I might change my mind in the future, but regardless my spending is working for me.

After all, it's free money for just spending what I normally would anyhow!


  1. One thing to consider when making big purchases with those awards cards is that if you pay cash instead, you can often negotiate a better price plus a 3% discount for not using a credit card. If you are buying a bedroom suite or doing a home reno, you might actually just be buying those points rather than earning them.

  2. Great point Aaron! I'm not much of bargainer, but I'm working on it. Other than tuition I haven't made any big purchases and I don't think the tuition would give us a break. When I do start the home renovations, I will try the negotiation technique and share how it goes.

    So with all our small (non-negotiable?) purchases and tuition payments we earned ~$550 in RRSP dollars.