Solid proof that consumers have been scared witless by the crushing recession…

Debit cards are overtaking Credit cards as the plastic of choice.

See the Wall Street Journal article, “Debit-Card Use Overtakes Credit,” by Robin Sidel (4/30/09, page C1).

And who can blame them?  Instead of racking up unpaid balances that accrue double digit interest and late payment fees,  you can feel virtuous about your newfound habits of thrift and budgeting.

But there is a paradoxical downside to this seemingly benign shift in habits:

You drop off the radar of the three major credit reporting agencies.

This has major implications down the road when you must tap the credit markets to buy a house.

To get a decent FICO score, you will have to jump through several hurdles.  You will be evaluated as to the type of credit you have used (revolving credit such as credit cards,  installment credit such as an auto or student loan, and mortgage credit on a previous home).

The greater the variety of credit used and paid in a timely fashion, the higher the score.

Conversely, the smaller the percentage of available credit you use, the higher the score…which is why you need more than one credit card to boost your overall borrowing capability.

It’s all derived from the old joke about bankers…they won’t lend you money unless you can prove that you don’t really need it.

The solution is simplicity itself:

Wean yourself from the debit card habit and find the most user friendly credit card available.  Our core card earns a free round-trip domestic flight for every $15,000 spent, and we pay every possible expense on the card to consolidate our accounts payable into one lump sum at month end.

If your finances are tight…the reason you switched to debit cards in the first place…simply enter each purchase as if it were a direct debit in your check register.  Then go online to set up a full balance payment on the recurring due date.

You know you will have sufficient funds, since you “prepaid” the charge with the phantom deduction.  You stop making charges on the card when your bank balance won’t cover it–just like a debit card.

What other advantages accrue, besides the bolstering of your credit score?

• A nifty annual summary of your spending, by category, to help in locating deductions
• The ability to nullify a purchase gone bad  (defective merchandise, over-billing, etc). Not an option with debit cards.
• Much more generous cash back and mileage awards.
• The four to six week “float” from the time you incur a charge until payment is made.
• The ability to rent a car or reserve a hotel room—again, not available with debit cards.

I applaud the movement towards prudent spending and living within and below your means.

But don’t tip the scales so far that you imperil your credit worthiness in your quest for financial prudence.

Sphere: Related Content

Posted: 05|8|09 at 6:25 am. Filed under: banking, credit cards, debt.
Comment | Trackback