Thursday, June 04, 1998

Foolish Tools
by Jonathan Dick ([email protected])

I must say I cannot take it any longer. Frequently in recent months, during my excursions to Fooldom, I have read repeatedly an opinion that seems to be a cornerstone of Foolish thought. Now I have reached my threshold, and I must declare:

Credit cards are not bad, and neither is credit-card debt!

"Blasphemer!" some of you might be thinking. "Who is this heretic so bold to challenge our theories in our hallowed halls?" (Actually these thoughts would be very Wise, so I expect no one reading this to have these opinions, but hey, it added drama!)

In my view, credit cards are Foolish tools; they make your life simpler and they help increase your wealth! Here's how:

Convenience - By not forcing you to carry large amounts of cash and/or a checkbook, credit card purchases are among the easiest forms of payment. Simply slide a card, sign your name and viola transaction over. [Editor's note: the same is true, of course, for a debit card.]

Rebates - A truly Foolish credit card user is in possession of a card that earns rebates of one form or another (and that doesn't charge an annual fee). Free gas, frequent flier miles, or some other perk can be yours simply by sliding and signing. How easy!

Maximizing Savings - One of the great wonders of credit cards is payment deferral. Suppose you purchase something today, get your bill in three weeks, and write a check for the balance two weeks after that. This process results in a roughly five-week delay from the time you received the goods until the time you pay. Meanwhile, your wealth increases because your funds are earning thirty-five days of extra interest in a high-interest-rate savings account! Very Foolish!

Obviously I have made several assumptions in this discussion, and these are key to making credit cards the Foolish tools I describe above. First and most critical, you must pay the balance off every month! Incurring one month's finance charges can eradicate any benefits you enjoy. Second, track your expenditures! Every purchase made with a credit card should be deducted from your checkbook immediately and the money considered spent (a program such as Quicken makes this very painless). Doing so helps to ensure that you're able to pay off the bill at the end of the month. Third, the funds you use to pay the bill should come from an interest bearing account that you can write checks against, such as a money market account at a brokerage firm. These can be established at no cost and allow your money to earn a relatively high interest rate (~5% per annum) before the check is finally written. Lastly, I assume you don't spend more money every month simply because you're using a credit card to make the purchases. Obviously, increasing your expenditures negates any of the savings/rebate benefits you are attempting to create.

In this case, as in most others, discipline is the critical factor that distinguishes Fools from mere fools. Having discipline enables one to avoid the many pitfalls usually associated with credit cards, and allows the Foolish shopper to use them instead as exquisite tools in the creation of wealth. So perhaps we can amend slightly the conventional views of Fooldom: Using credit cards are bad, unless you're a Fool with discipline!

[Editor's Note: We agree with the author. It's the average American carrying some $7,000 in credit card debt we're worried about, not the savvy and disciplined Fool described here. As with all good financial tools, abuse is what we're hoping to curb, not responsible use.]

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