In an attempt to win the credit card points game, I used my VISA for everything with the intent of always paying it off. I managed to do so until my spending got out of control and the monthly balance got higher and higher.
About a year ago, frustrated with my ever-increasing credit card debt, I swore off using it for my every day purchases. I committed to only using my debit card and spending the actual cash I had in the bank. And for a time it was working. My credit card balance stopped ballooning and I was finally able to start paying down that debt.
Credit cards were clearly evil.
But recently, even though I’m still working to get out of credit card debt, I’ve decided to dust off the VISA and start putting it back into use.
And here’s why.
I Now Have a System for Tracking My Credit Card
Credit cards were never my problem. Accounting was my problem. I blindly put purchases on the card while trying to keep a mental tally of approximately how much was being spent. But that’s a shitty way to do the books.
In truth, I wasn’t even close to knowing what was happening day-to-day. I had all sorts of streaming services, subscriptions, rentals, and insurance premiums dinging my balance on a monthly basis. Whoops.
Coupled with loose and free spending at the grocery store, and I had seriously underestimated how much money I needed to transfer over to keep the balance in check.
Everything changed when I signed up for You Need A Budget (YNAB). Their software handles credit card purchases incredibly well by allowing you to simultaneously track the amount you have set aside to pay down your debt, and cash you have available in the bank to cover your credit card purchases.
I could go into exactly how this is done, but you’re better off just watching Nick True’s video on how credit cards work in YNAB.
Long story short, as long as I’m tracking my purchases in YNAB I’m able to use my credit card with confidence, knowing that I’m not overspending what I have in the bank.
Credit Cards Are More Secure Than Debit Cards
Debit cards have several characteristics that make them riskier than credit cards.
I’d Rather Gamble with Someone Else’s Money
With a debit card, your money leaves your account immediately after you make a purchase. While with a credit card, it’s your bank that has to pay the bill. No money actually leaves your account until you decide to pay the bank back.
If I’m going to be putting anyone’s money at risk, I’d rather it be the bank’s, not mine.
Credit card transactions also have to go through a pending period before they’re approved by the bank. If you’re watching your card closely (as you should), this gives you some time to notify your bank of any fraudulent charges.
Monitoring and security services are also better with credit cards (probably because it’s their money), so you’re much likely to get a call from your bank or a freeze on your card if any suspicious activity is detected.
Debit Cards Put You at Higher Liability
Did you know that the laws surrounding credit card and debit card liability are different?
In the United States:
For credit cards, maximum liability is $50 for fraudulent purchases by law. Full stop. And most of the major card issuers offer zero dollar liability.
For debit cards, it get’s more complicated. Your exposure depends on when you notify your bank of a fraudulent charge.
|If you report:||Your maximum loss:|
|Before any unauthorized charges are made.||$0|
|Within 2 business days after you learn about the loss or theft.||$50|
|More than 2 business days after you learn about the loss or theft, but less than 60 calendar days after your statement is sent to you.||$500|
|More than 60 calendar days after your statement is sent to you.||All the money taken from|
your ATM/debit card account, and possibly more; for example, money in accounts linked to your debit account.
|Taken from this link at the FTC.|
This means that if you’re not watching your account closely, you could be taken to the cleaners. Some checking accounts are even linked to your savings accounts as a means of overdraft protection, which puts those funds at risk as well. Not good.
For credit cards, maximum liability is also $50 for fraudulent purchases if your card was issued by a federally regulated institution. And again, the major issuers like Visa, MasterCard, Discover, and Amex likely won’t make you pay anything.
For debit cards, protection is a little better than in the United States. You’re protected against all fraudulent charges, but only if you took certain steps to protect your PIN:
- keeping your PIN confidential and never sharing it with anyone, including a family member
- avoiding a PIN that someone could easily guess like a birthday or telephone number
- hiding your PIN while using your card at an ATM or a point-of-sale terminal
- not keeping a written record of your PIN close to your card
Taken from this link on Canada’s federal website.
What I take from the bullet points above is that, should you become the victim of debit card fraud in Canada, good luck proving that you didn’t hide your pin while using an ATM. Even if the banks do get you your money back, I’m willing to bet that you’ll have to wait until the bank does it’s due diligence to make sure they’re not getting swindled by you.
Again, you don’t want to find yourself fighting with the bank to get your money back.
New Perspective On Credit Card Points
I’ll admit, I thought I was pretty savvy.
I collected tens of thousands of rewards points over the last few years, and got a couple free car rentals from them. Yay.
But I stopped playing that game once I realized the banks had won. They knew I would overspend and eventually carry a balance. Once I realized that the money I gave them in interest far outweighed the value I got back in rewards, I switched up to only using my debit card for my every day purchases.
But I got back on the credit card wagon once I learned how those points programs work and who actually funds all of those flights and free toasters. But to understand this, you need to know how the credit card industry works.
First, credit card companies like VISA don’t have any relationship between you, the consumer. VISA is just a network that connects banks and facilitates the transactions between them. Every time you use your VISA, the store or restaurant that you purchased from has to give a little bit of that money back to their bank, since that’s who they have a relationship with.
That money is then chopped up, with small portions going to VISA and the merchant’s bank, and the majority going to your bank, since they are essentially paying for the item you bought until you pay your credit card bill.
This money that goes back to your bank is called an interchange fee, which is percentage of a product’s purchase price and is set by the credit card companies. And it’s this pile of money that funds the rewards you get for using your card. Bank of America, RBC, and TD aren’t dipping into their own pockets to thank you for using their VISA or MasterCard. That free set of headphones you got doesn’t get recorded as a loss on their balance sheet. This comes directly from merchants like Apple and Walmart every time you buy something from them.
Not all interchange fees are the same. Premium cards with better rewards typically command a higher fee, which banks love, but take more money out of the pocket of merchants. As interchange fees rise and as reward card usage increases globally, profit margins are being eroded to fund rewards for consumers. And merchants are fighting back.
But if you think going after VISA and Mastercard is how merchants are fighting back against shrinking margins, think again. In order to make up for their losses, they’re doing what merchants always do…they pass it on to the consumer.
That’s right, it’s we, the consumers who are funding these credit card reward programs. And if you’re using your debit card or paying cash, you’re still buying products at these inflated prices. A 2010 report by the Federal Reserve Bank of Boston found:
On average, each cash-using household pays $149 to card-using households and each card-using household receives $1,133 from cash users every year.
So yeah…I’m using my credit card “for the points” again…but it’s no reward. I’m just recouping some of the value I’ve already paid for through price inflation.
Love them or hate them, credit cards are a deeply embedded part of economy, and they’re not going anywhere.
And despite what Dave Ramsey says, credit cards are not stupid. They’re just a tool. And just like any tool, it’s in the user, not the tool itself, where stupidity comes into the equation.
But Dave Ramsey isn’t stupid either. He understands the psychology of spending, and knows that the easier access you have to your money, the more likely you are to spend it. That’s why he advocates for a cash-and-envelope budgeting system. It’s a labour-intensive way to spend, which means that you naturally spend less.
But for me, having a budgeting software program like YNAB changes all of that. I’ve been able to confidently track my spending, ensure I have money in the bank to pay off those purchases immediately, and still budget to pay off my credit card debt.
And of course, get those points baby.