Lazy Man and Money

Credit Cards as a Money Tool

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Much of America has is in debt. Sometimes it’s good debt and other times it’s bad debt. I wrote about good debt vs. bad debt last week. Credit cards that you don’t pay off are an example of bad debt. Many of them charge upwards of 20% interest. For that reason some people have decided to not to use credit cards at all.

It doesn’t have to be all doom and gloom with credit cards though. For those with the means and fortitude to pay them off every month, there are definitely rewards. Just be sure you can you handle the responsibility before you try. Here’s a list of the benefits that responsible users of credit cards enjoy:

  • Free Money/Rewards – I get 5% back on gas with my credit card. With my local gas prices at $4.55 a gallon, that’s nearly 23 cents a gallon. (My credit card doesn’t seem to available, but the Chase PerfectCard seems to be a good alternative with 6% for the first 90 days and 3% after that.) I get the same 5% off of grocery and drug stores. I get 3% off of restaurants, home improvement stores, and office supply stores. Every few months Chase sends me couple of hundred dollars. That’s one piece of mail I don’t getting. It is a lot better than using a debit machine that rarely gives you rewards.
  • Free interest – The extra time that I have to pay off the credit cards is time where I’m making a small amount of interest by keeping the money in the bank. Admittedly this is a very minor, but real benefit.
  • Enhanced warranties – Many credit cards double the warranty of many consumer products.
  • Consumer Protection – Have you been wronged by a merchant? Often times the credit card company will go to bat for you. I don’t use this benefit very often. I don’t want to be the one that cries wolf. However, once every 12-18 months, it proves to be a very valuable perk.
  • Building Great Credit – By paying off my credit cards each month, I have been building great credit for years. It paid off when it came time to get a mortgage and I qualified for the lowest rate – the teaser rates that very few people qualify for.
  • Emergency Protection – You never know when something is going to come up. I don’t want to carry that much cash on hand. Debit cards help, but I like to keep money earning the most interest possible. As such, I don’t keep a lot of money in accounts where I have debit cards.
  • Spending History – I can give a service like Mint, or Quicken my credit card transaction file and it will analyze where and how I’m spending my money. If I see I’m spending too much on eating out, I curtail it.

This is just another example how emotional control can add up to very real, tangible gains.

Finance 101: Good Debt vs. Bad Debt

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I’m amazed by the number of people who seem to be against debt. Debt has become has a problem in America, but I think too many people clump the good with the bad. To the people that don’t like debt, would you take a million dollar loan at 1% interest? I would. I’d immediately put it in a few interest baring accounts that are FDIC insured (I say a few because FDIC insurance doesn’t cover a whole million). At today’s rates, which are historically pretty low, you can make a guaranteed 3% on that money. That means the debt naysayers would be missing out on 2% of a million dollars, $20,000 a year. I’m pretty Lazy, but for $20,000 I can manage to set up some bank accounts.

Good Debt

When you can make more money than you are paying, that’s an example of good debt. Some people call it leverage. Here are some other examples of good debt:

  • Student Loans – The idea here is that you choose to into a little debt now, so that you can make a lot more money through the rest of your life. That extra income, in theory, should be enough to pay back all that debt and then some. Just remember that if you initially got a bad rate you can refinance student loans and save a lot on interest.
  • Mortgage – This is an area of wide debate – it might even matter where you live. If you had a mortgage in the early 1990’s there’s a good chance that the debt allowed you to own a home that appreciated in value a whole lot. If you bought in some markets in the last couple of years, there’s a good chance you’ve seen no appreciation and if you sold today would have been worse off than if you rented. In many cases, a mortgage is tax deductable and that’s very nice benefit as well.
  • Work Necessities – Many people don’t consider a car loan good debt. However, if you need a car to get to your work, I argue that it’s good debt. For it to quality as good debt, you’d have to treat it as purely transportation between two points, not a status symbol. When an expense is necessary to protect your income stream, it may very fit into the good debt category

Bad Debt

Bad debt is debt that doesn’t have an obvious way helping your finances. There’s a lot of debt that falls into the category of bad debt, which is often where bad debt gets its name. Do you use a credit card to buy CDs and don’t pay it off every month? That’s a prime example of bad debt. Many companies will charge you interest of 20% or more. It’s not long until you are paying twice as much for that CD as you should. This does not benefit your finances?

If you go into debt to afford a vacation, that’s bad debt as well. You might feel more refreshed and ready to earn more money, but you need to get your finances in the positives first.

Three Debt Questions to Ask Yourself

I like to ask myself the following questions before considering taking on any kind of debt:
1. Am I going to pay interest on this purchase? With my credit card purchases, I pay them back, so the answer is usually no.
2. Does this purchase preserve or grow my current earning potential? If yes, then it has potential to be good debt. I say potential because it’s not worth going a million in debt to earn a couple of extra thousand dollars a year. It’s also not worth protecting a $20,000 a year job.
3. Am I buying this because I feel “I deserve it?” This is often a danger sign.

It’s not always easy and straight-forward, but understanding the difference can be important.