I hear it all the time, You can't function in todays society without a credit card. Now that I have investigated this claim more closely, I have found this claim as completely invalid. You can absolutely function completely without a credit card. The thing is that most people don't have a clue how to do that. They have simply been educated by billions of dollars of advertising and marketing by banks and merchants about how to pay for things. They dismissed their grandfathers advice about living on cash as an old fashioned view and not up with the technology of today. But, there was a lot of wisdom in your grandfathers claim that has never been proven wrong yet.
I teach that people should cut up their credit cards, all of them, and never use them again. That is a pretty weird idea and people really get confused and start quoting their favorite finance guru on television, or their CPA, or their banker, even their CFP (Certified Financial Planner). The quotes almost always say something about keeping at least one credit card for emergencies. It really surprises me that these financial professionals have completely ignored the basic tenants of good financial planning. It appears that all the advertising and marketing of the credit card has even influenced financial professionals to have abandoned their rules for sound financial planning.
There are many reasons not to use credit cards, but I will highlight three here. First, the most important reason from my perspective is also the one that is widely ignored. It is the credit card agreement itself. Some years ago I tested the contract formation process. I called MBNA (one of the largest credit card issuers) and tried to submit an application after looking at the disclosures on their website for a particular account offering. I asked to see the actual agreement before I opened an account. The answer I got was no. I filed a complaint with the Office of the Comptroller of the Currency, the banking regulatory authority over banks, and they didn't seem to think there was a problem.
An MBNA executive called me and tried to explain that each agreement is unique and they don't know what the contract is until they open the account. If I didn't agree to the contract when I got the card, I could simply close the account. He failed to mention it would then show on my credit report, and I would be penalized for opening and closing an account. This form of contract formation is otherwise illegal. I should be able to read the contract terms before I sign it. That doesn't seem to apply to credit card issuers. They also can change the terms at any time because the account is really a series of new contracts with every purchase. These agreements are written to trick cardholders into technical default so they can change the interest rate at any time. You have also signed away Constitutional protections in a contract where you have no bargaining power (aka. An adhesion contract). This is also illegal. In the end, you have metaphorically done a deal with the devil. If you do a deal with the devil, you get burned. Don't do a deal with the devil.
Second, research has shown that credit card holders spend 12% to 18% more than those who pay cash. McDonalds did a market test where they found that consumers would spend more than 40% extra on average when they used a credit card. The psychological pain of spending is reduced significantly when you don't use cash; you are inclined to spend more. When they start allowing purchases by simply waving your card over a card reader, it will be even easier to spend. If you wonder where your money went at the end of each month, it is probably because you use credit cards.
Third, debit cards work just as well as credit cards for facilitating transactions and they don't get you into debt. Your fraud protection is essentially the same. You can still reserve a room in a hotel, rent a car, pay for meals, and do anything else you need to do. You can process your transactions as a credit card and the merchants don't know the difference. Hotels and car rental companies tend to be resistant because they don't have a blank check. Your authorization is limited to what you have in your checking account. My suggestion is that you don't do this on your main checking. Have a special checking account funded with your travel budget, so any funny business is caught quickly.
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Jim is a personal financial leading authority and author, an ordained minister, and an independent music artist. He has a Bachelor of Business in Finance, and a Masters of Religious Studies, graduating with honors. Jim has built multiple businesses since 1990, one of which was a computer training staffing company that grew to $6 million in annual sales with 21 employees and a nationwide customer base and competed as one of the top two firms in its market niche. He now owns his own independent record label and publishing company, which he operates completely debt free and owns the website www.howtolivedebtfreebook.com
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