The Best Worst Case Scenario: Part 5


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I’ve written many times before about some of the dangers and traps associated with the use of credit cards. But an article (with some interesting Facebook comments) that Megan sent me about a new credit card program with super-OMG!-amazing sign-up bonus features got me to thinking about the psychological effects of using credit cards and why we find them so hard to get rid of, yet so easy to rationalize.

I hope to make the argument that the rationales for the use of credit cards ultimately rely upon thinking primarily in terms of a best-case scenario and rarely take into account the substantial risk entailed by their use.

Read Part 1

Read Part 2

Read Part 3

Read Part 4

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One of the most reasonable rationales for using a credit card- and thus why I am saving it for last- is that credit cards are safer to use than debit cards.

Imagine this scenario: You normally spend around $2500 on expenses each month with your plastic card, be it credit or debit. However, you get hacked and someone goes on a spending spree, depleting the entire amount. With the debit card being linked to one’s checking account, that money is simply gone, and while you may not be liable for the fraudulent charges, it might take up to three weeks for the bank to put back in your account, during which time you still have to buy groceries.

However, with the credit card you haven’t actually lost any money, since you are floating those expenses on the credit card company’s dime. And since you aren’t liable in this case either for fraudulent charges, you aren’t out any money and can still buy food.

As I mentioned, I find this one of the more reasonable arguments in favor of credit card use. However, I still don’t use one, and I hope to convince you of the same. Here are some reasons:

A. Many think that debit cards don’t have the same sorts of fraud protections, but they actually do if they are issued by a credit card company through your banking institution. I was recently looking up my own bank’s protection policies, and debit cards have the same zero liability fraud protection as credit cards.

B. Megan is very diligent at watching transactions. We get alerted about all transactions, and she often knows that I got a Diet Coke at CVS before I even get home, and it’s only 3 minutes away! (And yes, I know about her Starbucks obsession too…) We even have things set up so that we can view transactions as they relate to different budgets, so we can see what is being spent on what, how much remains in each category, etc.

Additionally, we have alerts set up on our accounts if a certain threshold of spending is breeched on a single purchase or if the account balance drops below a pre-defined amount. We are also sure to inform each other about out-of-the-ordinary purchases we intend to make, and definitely talk through bigger ticket items before we spend the money. We also budget and track our accounts very closely and have lots of open communication about our finances,  both so that there is accountability and so that we both know how much money is available and don’t double-dip on the same money accidentally.

All of these help to create lots of levels of safety on our accounts so if one of our accounts was hacked, we could limit the damage quickly.

C. We like to have an overstocked emergency fund for emergencies like these. We also limit the amount of money that is available to the debit card so that we limit the amount of temporary damage that can occur.

D. When shopping online, we only purchase things through sites that have the requisite encryption or allow payment through a secure third-party payment platform.

Of course, there still remains that pesky situation where there are fraudulent charges and you are out the money until the bank (or credit agency) resolves the disputed charges and puts the money back in. Isn’t that sort of scenario enough to merit the use if a credit card?

As I have thought through this issue, ultimately all of the arguments that have come before still lead me to say no, primarily because when you stack all of the downsides and potential risk of credit cards up against the mitigated risk of responsible and diligent debit card usage, it doesn’t really even compare.

Another thing to keep in mind: whenever there are disputed charges, the credit card company is ultimately the one to decide if the charges are fraudulent or not. Then focus is always on the lack of funds in the debit card scenario, but I rarely if ever hear any one raise the possibility that the fraudulent charges may be deemed not fraudulent and one is left on the hook for the charges.

In the debit card scenario the money is gone and other arrangements have had to be made; it’s a tough pill to swallow, but the loss is mitigated by the amount that was in the account.

But what if you have a credit card with a high credit limit? (And remember- we have seen some advocate applying for higher credit limits every six months!) If one is left on the hook for those charges, the potential loss is potentially much more substantial, and since it was being floated, may entail there is no money available to cover the balance, which might activate interest and other unfortunate scenarios. A well-stocked emergency fund would of course be useful here.

In the end, in the fraudulent charges scenario one is not necessarily better off with a credit card than with a debit card.

In the case of no emergency fund a credit card might ease some short-term shortfall, but also carries much greater risk if the charges are not deemed fraudulent. In the case of an emergency fund it is a relative wash as far as the short-term is concerned, but since credit cards always represent financial risk, they short-term break even is obviated by long-term risk, which is exacerbated the more interaction one has with debt, especially as that interaction is with greater levels of credit.

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In the end, credit cards always represent financial risk, and are fraught with peril the more interaction you have with them, since that interaction necessarily entails debt.

Credit cards are a debt product, and it is in the best interest of credit card companies to provide you with the best debt product they can, which will always be to their ultimate benefit, rather than yours.

The potential upsides of credit card use do not provide a reasonable rationale for their use, and ultimately assume a best-case scenario as part-and parcel of their justification, and thus should be avoided at all costs.


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