A debate over credit cards has been swirling between Ana of Debt-FREE Revolution and Madison of My Dollar Plan. I really hate to get on the bad side of Ana – she has a serious antipathy toward plastic – but I must come down on the side of Madison.
You see, we began the year with a negative net worth and during the course of the year our ARM mortgage adjusted up two points, we had a third child and my wife quit her job. Yet as we begin 2008, our net worth is positive – just barely, but positive nevertheless. How did we do it, you ask? Here are some of the ways reasons:
The first was that we had a better handle on our budget than ever before. No one makes good financial progress without first seeking to control spending.
The second reason was bank bonuses, credit card bonuses, credit card arbitrage (stoozing), and credit card rewards. Three out of those four streams of income include the use of credit cards. If I go to great lengths to save money on laundry detergent or bag my own lunches, the least I can do is pick up $100 here or $50 there from credit card bonuses. Furthermore, it is just as easy for me to borrow money at 0% and deposit it in a bank where it earns 4 to 6% interest, than it is to save money on car insurance. . . and if you can do both. . .well. . .things can start to turn around quickly.
The truth is, getting rid of plastic in a quest to balance the budget is a good step for most people. Destruction of credit cards is a useful tool in the frugal finance war, but I believe that strategy does nothing to address the core issue: controlling spending. It is analogous to chaining a dog to a tree in order to teach him not to bite. The undesirable behavior stops, but the dog still has the same problem. You must eventually control his behavior by other means than a rope if you are going to make him into a good dog. In the same way, I need to learn to control my spending no matter what form it takes – cash, card, check, money order, traveler’s checks, etc.
So at the moment, we are doing well with our credit cards controlling spending and earning cash back in the process. We hope to cash a $250 reward check from Chase near the end of April.
Greenbacks don’t give me that option.