The Motley Fool: The Fribble, Life With Credit Cards, by Kim Alexander

Tuesday, March 03, 1998

Life With Credit Cards
by Kim Alexander ([email protected])

I am relatively new to The Motley Fool, but not new to sensible money management. While I agree with most of the things I have seen written in the Fribble and throughout TMF, there are a couple of often suggested items that, quite frankly, I do not do.

First, I use my Master Card. A lot! My wife and I charge everything. (Collective gasp!) And I mean everything. Auto expenses, groceries, dining out, dentist, housewares, clothing, dry cleaning... you get the idea. Any day-to-day living expenses that we can charge, we do charge. Are we crazy? No, we pay the card balance, in its entirety, every month as advised in the Motley Fool Debt area.

Why in the world would anyone want to do such a thing? For one, we don't have to bother with taking our checkbook every time we go out, or who has possession of it, and whether our check will be accepted. Likewise, there's no need to carry much cash. But the biggest reason, is that we get a 5% rebate on everything we charge. That's like saving 5% on virtually all of our living expenses. Not bad.

We use a GM Card. For those of you who are not familiar with the concept behind this card, GM will credit 5% of your purchases towards the purchase of a new vehicle. You may accumulate up to $500 per year, for seven years. We max out our yearly allowance in six months or less. So we simply applied for, and received, a second card, in my wife's name, with a different account number. When we reach our limit on the first card, we put it away, and max out the second. (We only carry, and use, one at a time.) By now the first card is usually eligible for its next go-round.

If not, we use a Discover card in the interim. Hey, that paltry 1%-2% cash-back rebate is better than nothing! Naturally, self-discipline must be exercised. All sound, personal finance rules still apply. No impulse purchases, smart budgeting, good record keeping (with receipts), and also, making sure you keep the checking account balance high enough to pay that huge monthly statement. In full! Every month!

This leads me to the second suggestion that we do not follow, which comes from the MF Car-Buying area. I understand full-well that buying a new car is like buying a front-loaded mutual fund. Hold on now, I'm not espousing the virtues of mutual funds, just trying to draw an analogy. As with the loaded mutual fund, the purchase of a new car "takes" some of your money up front, about a 10%-20% immediate decrease in value. However, with the money we have accumulated on our GM Card, it's like buying a no-load fund.

To be specific, the last new-vehicle purchase we made was a 1995 Chevy Astro. After I made my best deal, which was under $500 profit to the dealer, I informed him of my intent to use our GM Card rebate. When he called to get the exact amount we had available to redeem, it came to $3,133.97! That easily made up for the money I lost as I drove off the lot. So, I'm driving a new vehicle (not to mention enjoying that smell they throw in), with all the warranties and amenities that accompany it. No worry about how it's been treated either. And I'm sorry, but I like driving new cars.

Now, don't get me wrong. In theory, the idea behind getting rid of your credit cards, and driving used vehicles is good. But being Foolish, to my way of thinking, is taking control of your finances and investments, and managing them wisely, because nobody can do it as well as you. The above ideas work for us, and I feel as though we are still behaving most Foolishly.

[Editor's note: We agree! By paying the credit card balance in full every month, you're being extremely Foolish. Our preaching is really aimed at getting out of credit card debt purgatory. You're simply using your card as a cash-flow mechanism -- and getting a bonus for doing so. Fool on!]