Thursday, May 21, 2009

Why use a credit card?

For responsible consumers, credit cards are a great deal. My wife and I put as many expenses as we can on our credit card, and then responsibly, pay the balance by the monthly due date. With the caveat that you should not use the card to justify spending more or incuring debt, I highly recommend paying your bills this way. There are two key advantages to doing so:

1. Budgeting. Paying for everything by credit card helps us manage our finances because our monthly statement has a record of what we spent and where. It is like an automatic checkbook balancer for our credit card payments, and the printed form has better handwriting than me. American Express even gives us the option of analyzing the expenditures by category, so we know how much of our money went to various broad types of spending.

2. Cash management. Paying for everything by credit card means that we do not need to hold much money. On average, I walk around with $20 in my pocket. For most of my purchases, my plastic money more than suffices. Carrying less money has side benefits. First, I worry less about what I would lose if I were robbed. Second, we can leave the money in an interest-bearing account until it comes time to pay the bill. Such a deal!

In the near future, we might be saying how good of a deal credit cards used to be, at least if the banks are told by Congress that they cannot charge more than a "reasonable" rate of interest. The banks are saying that if Congress imposes this ceiling, they'll be forced into one of two alternatives: bring back the annual fees or start charging interest from the second you make a purchase.

This leaves me with several questions for the readers.
1. Should Congress impose an interest rate ceiling? And, if so, what should it be?
2. Do you think banks will follow through on their threat to charge the "good apples" more money?
3. Of the two proposed changes, annual fees or immediate interest accrual, which would you prefer and why?

I look forward to hearing what you have to say. Happy commenting!

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