Control the behavior, don’t just limit your options

by Rocket Finance

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.

  1. 11 Responses to “Control the behavior, don’t just limit your options”

  2. By plonkee on Jan 8, 2008 | Reply

    Getting into debt through poor money management and getting out of debt by good money management using the same tools is brilliant.

    I really admire your ability to avoid temptation but just not doing it, and and inspired by your determination to pay off debt the financially optimal way. Ace.

  3. By rocketc on Jan 8, 2008 | Reply

    I’m not perfect in my avoidance of temptation. . .but Mrs. Rocket and I constantly keep each other accountable.

    No perfection here, but we had no choice but we had to find a way to free up some cash.

  4. By Jeff on Jan 8, 2008 | Reply

    Excellent post!! I fully agree with your view point, and adressing the core issue rather then the symptom that so many want to bandaid.


  5. By glblguy on Jan 8, 2008 | Reply

    I agree, addressing the core issue is key, but that isn’t as simple for most people as saying “I won’t use them and will pay them off”. If it were that easy we wouldn’t have the debt statistics we have, nor would credit card companies be the profit centers they are.

    For some people like me, I think I have addressed the behavior problem, but I went a step further and eliminated the temptation as well. I mean if you are an alcoholic having a bottle of whiskey in your house probably isn’t real smart.

    Even when you use credit card you are assuming some risk. They miss a payment, change the rules on you, change your payment date. They are masters at the game, don’t forget that. They make the majority of their money when you pay after the grace period.

    Finally, I just personally don’t want to endorse companies that can cause people such great financial problems. Understand this is a personal decision and I respect your Rocket.

    I do agree with Plonkee though…love irony of using people using what got them into debt to get out! Just too risky for me…they have a lot more time to think about how to weasel me out of my money than I do to watch them.

    I’m done, see ya Visa and Mastercard.

  6. By rocketc on Jan 8, 2008 | Reply

    Thanks for stopping by. I think this is definitely an issue where good (I think) people can disagree. For the last 6 months my cc’s have been slowly getting me out of debt – we’ll see where I am in another six months.

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  9. By My Dollar Plan on Jan 16, 2008 | Reply

    You hit the nail on the head: Control spending!

  10. By Dana on May 7, 2008 | Reply

    I am totally on your side on this one. In fact, except where they are blatantly lying to customers or doing sneaky things behind their backs (I think Universal Default is a heinous practice that ought to be illegal!), it isn’t the credit card companies causing people so many financial problems. It’s the people themselves not using financial resources wisely.

    I can say that. I got a credit card in my early twenties with an original credit line of $3k. I had such a good record with them that they gradually increased the line to $5k or so, and then my husband got in trouble with the Army and we broke up suddenly. We’re talking about the kind of trouble that gets you knocked down to E-1 from E-4/corporal. There was no way I could keep up the payments.

    So, been there, done that. And did the credit card companies hold a gun to my head and make me run up my balance? Nope. That was me. (My husband, too, but I didn’t have to hand over my card to him. I could have said, “Hey dude, get your own.”)

    I have also been interested to learn that credit card transactions are protected by federal law where debit cards are not. So, in a bid to Band-Aid their spending problems, lots and lots of people are putting their finances at risk with debit cards in the false belief that they will get into less trouble. But I’ve seen someone get slapped with an overdraft fee because of a $75 hold charged on his debit card by his bank because he bought gas, and I’ve had $15 pulled out of my savings account into my checking for the same reason, and I don’t like the idea that I could be liable for up to $500 in purchases (that I almost never have in my account to begin with)–or worse, if I don’t discover the theft of my debit card number within 24 hours. Whaaaaat?

    I guess this issue requires a combination of taking real responsibility for your actions and some serious homework on the pros and cons of various financial tools, and I guess I am repeating myself here. Band-Aids don’t cut it when you’ve got a nick in the jugular.

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