Credit-free Plastic

July 25, 2009 at 3:25 pm | Posted in Economoney, Internet, Online services | 5 Comments

If you’re carrying a balance on credit cards, you are likely paying interest rates we would have recently called usury. You are also falling into the trap of debt-financing your life, making you a wage slave and dramatically limiting your choices.

As I review in Why You’re Not Rich, we get sucked into expectations and entitlement through incessant advertising. As I spoke about on Debt Crunch, living on credit cards has become so common we consider it normal. But wasn’t slavery abolished a long time ago? Isn’t life supposed to be about having fun, not things?

The wide use of credit has also added about 5% or more to the cost of all goods you purchase. It’s like a hidden tax paid by sellers with each transaction so it’s built into the price.

While paying your credit cards off each month avoids the interest penalties, you’re still in essence creating a short term loan each time you use it.

When I looked at the costs in my own life and that of friends, I moved away from using credit cards. They essentially set you perpetually a month behind and encourage you to live at the limit of your income or beyond.

Debit cards allow you to live in the present and in reality. This allows flexibility, choice, and considerably simplifies ones book-keeping. Not to mention making it a much less scary task. If you do most spending though one debit card, the bank does your statement for you. And it’s easy to export into a spreadsheet.

Additionally, in Canada Interac is non-profit keeping the fees minimal. For retailers, it’s about .25 cents vs 3-5% if you use credit. AmEx is worse.

The only challenge with running solely on debit/cash is that the occasional thing requires a credit card, especially on-line. eCommerce was built on credit cards. Some of my suppliers have an on-line debit choice but many do not.

One option is to keep a credit card for such things. You can get “prepaid” credit cards that allow purchases to a deposited balance. But even better is a credit card that’s really a debit card.

Recently, several players in Canada have introduced “travel” or “gift” cards. They  behave like gift cards but are a Visa or MasterCard. They are designed to be used for trips or given as gifts. Like some gift cards, some can be recharged.

Here’s a great review that covers some need-to-know details. For example, they are a great alternative for on-line transactions as they have increased privacy and you control the limit. They are also great for travel or special purchase uses, like a new small business.

As he observes, they sometimes don’t work for some hotels as they like to “reserve” more funds than have been booked. And some cards are rip-offs.

He recommends the BMO “Travel Mosaic MasterCard” as it’s a single up front fee ($10), reloadable on-line, no purchase charges, allows cash advances, and has on-line statements. The Royal Bank “Visa Gift” card is more private as it has no name on it, is just $4, but they start to nickel and dime you over time. For this one, you need to register a name for it to use it for some things, like on-line. But for others, greater privacy.

A friend of mine recently got a BMO card and they included a small overdraft. Thus, there may be some impact on credit records in that circumstance. (turns out to have been misleading info from an employee) These are not the kind of things you want to use to build credit however.

I’m not suggesting a total avoidance of debt. Mortgages can be a powerful way into wealth building. But again, that’s much harder to do with 5% down. Look back a few years before all the easy credit and you find much larger down payments required. Debt as an investment tool can be useful but for heavens sake don’t use plastic financing.
David

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  1. Another friend got a BMO card with no overdraft. It mentions fines for going over. He activated it online and loaded it from a Scotia bank account.

    Transferring from another bank may take a few days to load, like writing a cheque. If you have a BMO account, even better.

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  2. NOTE – without a name on the card, some online services won’t work. Thus, the BMO card is better. Cheaper if used regularly too.

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  3. Today, got a flyer in the mail for a “Visa Prepaid card” today, suggesting it as a gift – with Olympic logo and images.

    Interestingly, it’s just a Visa card.

    The page also has a link to register the card to “improve its acceptance online”. I assume this means give it a name and address that online forms use to further verify the number with.

    Enter
    canadapost.ca/visaprepaidcards
    and it forwards you to the address.

    Ah – “Contact the Card Issuer” takes you to VanCity, a Vancouver credit union. Actually all the links go there. “About the Card” on the Vancity page tells you about precautions and how you’ll get fees and how your balance must be spent in 6 months. Like the Royal card above.

    It’s also designed as a limited edition card so is not for long term use. But another option.

    Checked and Vancity offers them directly:
    https://www.vancity.com/VISA/GiftCards/

    They charge to load them though which the BMO doesn’t. Thats not as good for ongoing use. But if you have a VanCity account, it may work for you.

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  4. 2012 sees the BMO card change a bit. BMO has introduced an annual $7 fee rather than $10 for 3 years, but still no interest charges. Cash advance fees are high, so I’d use Interac for that.

    Only issue I’ve had is with gas pumps viewing it as an “International” card now, obliging me to prepay inside. The above cautions about car rental and hotels over-pre-charging and it otherwise behaves the same as a standard credit card. Never had any trouble with online purchases and if there’s been a shortfall of funds, a quick bank login can up the balance and fix that. (assuming a BMO account. An account transfer like that is almost instant.)

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  5. Currently you can load the BMO card from these banks:
    RBC, ScotiaBank, CIBC, PC Financial, HSBC, ATB (Alberta Treasury Board) and TelPay.
    And of course BMO. On BMO, you can add it to your online accounts so you don’t have to log in separately.

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