Suppose you have enough disposable income to pay for a new $1200 TV over the course of 12 months. In scenario 1, you save $100 each month. The bank pays you 0.5% interest. As of January 1st next year you'll have a new TV and $2.75. In scenario 2, you put $1200 on a credit card with a 10% APR. You pay $100 each month towards the credit card bill. As of January 1st next year you have a TV you've been watching for a year already and owe $69. You've essentially paid $72 for the privilege of getting the TV you wanted a year earlier.

Is that worth it? Well that depends on a lot of things, some of them intangible, but I wouldn't say it can't possibly make any sense. The sort of Puritan attitude towards consumption and debt may not be the worst attitude to have, at least for oneself. But when combined with evangelism it is pretty annoying.

So many of the people bitten hard by the 2008 recession applied logic such as yours, and often drew down on their mortgages (cheaper than credit card) to buy TVs, cars and holidays.

Borrowing against a growing asset is different.

I'm a "reformed" credit card user. I haven't borrowed for anything apart from the house in around 15 years. It's not a problem, and the kids don't miss out on having too much stuff either!

I've never used a credit card, because people like you got to me before I was old enough to apply for one and warded me off, so thanks :)

However, what's your experience with taking out that home loan? I'm worried that I might one day ask the bank for a serious loan (with a suitable amount of pre-savings) and be informed I cannot be lent to because I have no credit history at all. I know I can get a credit card and always pay it off at the end of the month to get a credit history, but by golly does playing that game sit ill with me.

If you consider your credit card to be a no-fee (or low-fee) payment mechanism that aggregates your monthly expenditures into a single bill, you can have savings theoretically (though in reality, probably not usefully) appreciating over the course of the month in a bank account, and then pay the bill for your expenditures at the end.

This simple money management technique reduces fees paid for ATM access, allows your assets to maximally appreciate, and builds up a very solid credit history. Credit Cards and Lines of Credit aren't evil; they're useful, but they're not hard to use in a manner that will bite you.

* Pay the entire balance every month, ideally by direct debit (they don't like doing this) * Ignore offers to increase credit limit * Actively reverse automatic credit increases. My card company tried ridiculously hard to talk me out of reducing my credit limit.

This type of credit card customer is by far the minority (10% iirc), and least welcome to the card companies. Their ideal customer has multiple cards and pays minimum balance every month.

Student loans also count towards credit worthiness.

For a home loan, having little or no credit, isn't necessarily a deal breaker, but does limit lender choice. At least in the UK.

I dislike the game partially because the more indirection between spending and the actual money, the easier it is to overspend or lose track. This is the whole point, of course! So I just stick to the debit card for net, and actual cash from ATM when out shopping.

I do know the UK doesn't use credit score as the US does, so it may operate on a different premise where gaming the score matters.

A card user who pays their balance every month is still valuable to the card company though, as it draws fees on every transaction. Someone who uses their 1.5% cashback card to pay for EVERYTHING and puts a couple thousand a month on the card brings in some cash too, and the day they lose their job they might start racking up debt.

At one point I had as much available credit across two cards as balance on the mortgage, whereupon I decided it was silly and I'd like them to reduce please.

Why? They are giving you free money for your trouble (1.5-2% back, a proportion of the transaction fee they've effectively baked into the price of all consumer products) and offloading the risk of having your bank account drained through a debit card or getting mugged for your cash.

Time was you got tax relief on mortgage interest, and crucially there was enough inflation in the system that a mortgage was an insanely easy choice. A little inflation would deflate your mortgage payment down to truly trivial levels over the life of the mortgage. Because of the removal of inflation your mortgage payment is no longer an ever decreasing proportion of your income, ignoring pay rises, so the only remaining factor is what you believe will happen to rents.

Our credit score were upper good before and near perfect now. We've not used a credit card in eight years.

You can get a free copy of your credit report once a year from each major company - you could go ahead and order them just to see where you are at.

There are many reasons to use one. Others here have already given you some. But I want to add one more good reason: protection. So here you go:

- I try to pay for all restaurant meals with a credit card. Then, e.g. if I get sick eating at e.g. Chipotle, there's at least a record that I purchased something from them. If I lose the receipt I might not remember whether it was a taco or a burrito, but I'm still way ahead of someone who paid cash and doesn't have his receipt!

- If I have a dispute of any sort with the supplier, it really helps to at least have the threat of a credit card chargeback available. Too many disputes or chargebacks are bad news for vendors, and most will want to avoid those.

- Some cards will extend the warranty on a purchase, but I've never availed myself of that feature so I don't know how easy it is to use.

I've also used price protection with Discover. Also easy to use but they take a couple weeks to process the claim and mail the check (a third party processes it)

Price protection is pretty unique - not too many cards have it. If you find a lower price later on an identical item they refund the difference. I used it to get black friday sales before black friday.

Debit card?

The lender wanted to see loan with fixed payments in the past 3 years (which my wife had, a car loan). Sure, maybe we could have argued, etc. but a credit card paid off each month wasn't a magic bullet for building credit history. I'd say get a nominal loan (not simply a credit card) to build up credit.

"Not paying interest on any card" is desirable. "Not having any card" works against you in your situation.

These are all great reasons to have an emergency fund which covers the payments on all your debts (and your other expenses) for a few months. Then if you're in a situation where you need to use it, you can make a decision about whether to try to offload the debt or just pay it out of savings.

I'd take $20,000 in savings + $20,000 in debts any day over $0 in savings + debt free. Obviously you need to factor in interest rates, but with cash and debt you have options. With no cash and no debt you are screwed should anything go wrong. (Although the best is still cash + no debt).

That's not what an emergency fund is for. An emergency fund is for essential expenses, such as rent (or mortgage), food, prescription medicines not covered by insurance, and so on. If you are in the "I'll just use my emergency fund to pay off my debts in case disaster strikes" you've already lost the game.

20k amount financed on a car @ 2% for 48 months: $434/mo. Save that (in addition to your other savings) for 6 months, then finance the car. Then you can absorb a 6 month unemployment stint out of savings, during which you can downgrade at any point if necessary. Or you can wait an extra 42 months to save $827 in interest if that's worth it to you, but either way the risk is managed.

I think this is a good point, but the sort of people who would need a year to save $1200 do not have the sort of credit to get a 10% APR credit card, APR's closer to 20% or higher are more likely. Run the math again at 18% APR ($133 in interest over the 14-month payoff period) or even 24% ($185 in interest over the 14-month payoff period), and you quickly see just how much premium it costs to get that TV a year earlier.

I'm ignoring the negligible savings rate interest in your example and, probably foolishly, assuming this hypothetical person only has this single CC debt.

I feel like the issue isn't just the TV. It's that it's the TV, plus the next thing, plus the next thing. Or in other words, tiers of debt usage from best to worse: (1) completely avoid paying interest charges, (2) pay interest charges on large purchases with full knowledge and planning and in a responsible manner, (3) pay interest charges without knowledge of what you're paying or what to do about it.

Personally, I think it's a failure of financial literacy of the US educational system on one of the most important aspects of kid's lives. I have met incredibly educated people that are still ignorant about how credit cards/interest charges work and only internalized "Never use credit cards!" advice. I've also met less educated people who never think past "This is what it says the minimum payment is, so I pay that."

Neither position is good. And they. aren't. that. complicated.

The disclosure sheet gives you annual fee (if any), APR when interest is charged, and any penalties that may result in an APR adjustment. After that it's simply "If you have a >$0 statement balance from the previous month after your due date and payment, then you begin accruing interest on the daily total of your balance." Not rocket science.

I still don't get it. My credit card is a device by which my bank gives me some incentive (aeroplan miles, cash back) to put my transactions on a card and then immediately pay them off, instead of performing those directly against my bank account.

I feel that on a rational level, I understand the credit card companies' game, but more than that, I fear them and their power and intelligence.

Sure, I'd like to think I'm smart enough not to be tricked by them, but it's safer to avoid the deal with the devil altogether.

I'd only say two things in defense of credit card use (both valid in the US - not sure about other countries):

- Credit card companies are required to compile all of the information I mentioned into a fairly standardized form per the Truth in Lending Act (see: https://www.federalregister.gov/articles/2010/02/22/2010-624... )

- Credit card companies are competing for your business. At least with decent credit scores, it doesn't make sense for them to have unreasonable terms or try to screw you over

Get a no-annual fee credit card. Put it in your sock drawer. Take it out every 6-12 months and buy lunch with it. When you get home put card back in sock drawer and RIGHT AWAY pay off the amount you had for lunch on your bill. (You almost always can make payments on a zero balance. Citi was kinda weird about it but I make payments over my balance all the time and only Citi gave me a "can't pay over 20% of your balance").

Just having the card and not using it "counts" in your score. The lunch is just to keep the bank from marking your card as inactive and cancelling it.

If you feel you will be tempted to use it to increase your overall spending - then by all means avoid it.

My credit score according to Credit Karma is 811, which I think everyone could agree is very good. I just spot checked two of my credit cards, and they're both at about 16% interest. Now, maybe I could get a lower rate if I asked, but that's what they gave me by default. It doesn't matter to me since I never carry a balance (in fact, I didn't even know what the interest rate was; I had to go look). But 10% does seem pretty optimistic.

That said, I agree with the overall point. It should be acceptable to use credit in the situation described, as long as you're completely aware of the actual cost and are making a rational decision. Unfortunately, too few people do the math, and even for very educated and intelligent people, purchasing decisions can be irrational.

If you really pay off every months you want a 45 day carry before interest and cash back. But, they often have much higher rates.

PS: I have two one at 9% another at 12%, but the 12 has a much higher limit.

We've paid off Couches, A refrigerator, a new Sewer Drain, and several other things (a nice Kitchen Table most recently) this way. It's not as good as saving for it, and getting a few dollars of interest, but that's a marginal gain anyway.

Ultimately, these deals are subsidized by people who get charged with massive deferred interest payments because they don't plan properly, and that sucks for them, but as you say, it's a great way to start experiencing the benefits of a purchase instantly.

Even better is to use the financing opportunity on something that makes money. I've furnished apartments using 0% financing, and I'll get anywhere from 50%-100% increase on rental income for a furnished apartment - while paying no interest on the loan! It's like putting extra money in your pocket every month for free.

Indeed, and it's important to point this out to those who insist "Average Joe" doesn't benefit.

Three of the largest investments people will make in their lives are 1) their home, 2) their education and 3) their vehicle. All 3 are generally financed, and financing rates are at historic lows.

A quick look up says that Best Buy offers 11.9% APR for select purchases, or 25% for others.

There are plenty of high income earners who are just as irresponsible with spending as some low income earners. I always had a good credit score during the years it would have taken me a year to save $1200.

In scenario 2, you're stuck going to work for the entire 12 months to pay off a TV that will be obsolete by the time you finish paying for it.

Scenario 2 robs you of your choices, because you're making a promise of future labor. Scenario 1 leaves all your choices on the table.

For the record, mine is close to 18 years old and continues to work just fine for watching broadcast television. Yes it's fatter than those newfangled flat things, but it doesn't watch me watching it, it doesn't record my conversations, and it doesn't report my viewing habits back to the mother ship. One day it will fail and I'll be forced to get a new one.

It's actually getting pretty difficult to buy a new "dumb" TV these days. The last TV I bought was in November 2014, it's a normal 50" Plasma screen TV with zero connected features. Some of my relatives liked the TV and asked me to find them one like it and I can't. Apparently TV makers have decided that making good TVs isn't important and packing them with smart features I don't want or need is the way to go.

That's the key point. Your TV is fine because it's old. New ones are built with planned and unplanned obsolescence (unplanned is when your "smart" TV loses half of its functionality because some service goes off-line or even changes their URL or something).

Video and Films are my business and my TV is a nearly 5 year old LG plasma that still performs great. And I only bought it because my ex kept the Panasonic plasma after the break-up or I'd probably be using an 8 year old TV.

Are there any reports of smart TVs not working completely (inputs stop working) because the "smart" connected features stop working?

But the person who bought the TV on interest is in debt, has less credit to live off of, and only a TV to show for it.

-----------

In either case, saving up a pile of 6-months of expenses cash-on-hand is a good strategy. If you have 6-months of expenses saved up, you simply buy the TV with that money, and then in a year you put money back into your cash account.

Look, now you have the benefits of all strategies! Saving up money for emergencies, or even large expenses (LONG before you even think about those expenses) is the way to go.

Touching your 6 months emergency expenses fund is completely against the point. The reason you have this cash is for out of the blue, hit by bus kind of events. You need it when you least expect it

If you take your TV out of it you no longer have it - and this fund becomes nothing more than a general savings account. The kind of thing that drops low right after you buy a TV, or a car, which from my personal experience is exactly when bad things happen. And often bad things require cash on the barrelhead, not just credit cards.

So don’t do this. Either save in a slush fund for your TVº, or put it on a credit card, but don’t take it out of your emergency fund and still call it an emergency fund - 'cause it’s not going to be there for you in an emergency.

º or my personal favorite: a throw away, but named, savings account. (Like CapOne360, née Ing Direct, offers.)

A typial 6-month Emergency fund is somewhere on the order of $15k, depending on where you live. This is more money than the typical American 40 year old has saved up their entire life (including retirement accounts)

http://www.fool.com/investing/general/2015/05/17/americans-a...

If you manage to have $15k, and you are making a big purchase, do use it before you start using a credit card. Now of course, if you have $15k "Emergency use only" PLUS $5k "discretionary", then yeah, spend the money from your discretionary account first.

Seriously? I feel like an old man. I had that much money saved in less than a year from starting my first part time coding job.

In fact the whole not saving money thing seems a bit strange to me. My monthly cost have remained relatively stable for almost a decade while my salary keeps going up.

Now if your heater breaks and requires replacement, that might be a reason to tap into savings.

But I recognize that I personally like to live on low expenses, lower than other people. For the spenders out there, even just saving up enough for an emergency fund is a big deal.

The important thing is that piles of money are a tool, as is credit (including credit cards). Use the tools as you see fit, but there are definitely "best practices". If you have a large pile of money (ex: Emergency Fund), it makes more sense to buy using that money rather than to dip into credit.

After all, you could always use your credit card in an emergency. Spending available cash first will be cheaper in the long run (as long as your spending habits remain in check)

And that's almost an entire month of savings.

Now, correct your rates with what's on the other replies, and we are suddenly talking about 2 or 3 months of savings. Just for getting that TV an year earlier.

Yes, that may be worth it. But almost always isn't.

I don't disagree with you, but until you provide some evidence this is just the opinion of some random stranger on the internet, and should be taken with a pound of salt.

If you don't have $1200 for a TV you shouldn't be buying it. It's not as if you can't buy a perfectly reasonable TV for much less is it?

Or at least, it's pretty common among the folks I hang with. The car-loan phenomena is baffling to me; why would you pay interest on a depreciating asset?

A five year new car loan from a credit union -- no shopping around -- has a cost of something like $58 / $1000 borrowed. So even if you have $20k cash on hand to buy a new car, for a thousand bucks you can maintain an extra $20k of liquidity for expenses that are more annoying or more expensive to finance, like auto repairs.

My native country has a central database of every single loan outstanding. Lenders have to consult that before granting a loan and stay within certain limits. So at least here, an outstanding car loan might disqualify you from a home loan because of a lack of solvability...

I took his point as: Some people buy an expensive car they can ill afford when they could buy a cheaper one that will do the same job.

Like my TV example, but with a car.

(UK figures)

https://www.gov.uk/government/uploads/system/uploads/attachm...

In 2014, 54% of all car first registrations were made by companies.

Which is lower than I would have guessed, but still significant.

Less common in Australia because they have (had?) a domestic market to protect -- import tariffs made it less attractive.

Tv don't enable you to get a better job/keep your current. If you want the argument to mean anything then you have to trade like for like. A nice couch will last years and it is still a frivolous consumer spending object. Is it worth it to pay ~80 usd to have the couch a year earlier?

> > > > Here's my argument.

> > > That argument's too weak.

> > Okay, here's a stronger version.

> No, you have to stick with the weak version.

Personally, I want to hear the strongest version of the arguments when I'm making a decision.

https://www.youtube.com/watch?v=PHe0bXAIuk0

It doesn't even have to be "not investments", it can be appropriately risky investments that just don't pan out (perhaps even systemically due to a "black swan").

There's inherent variation, ebbs and flow, in the economy that we won't ever be able to smooth. Booms and busts will occur because those on the credit margins always represent "going too far".

Does it show any evidence for that theory?

The only time I buy anything on credit is when it is zero percent on the terms and even then if I could buy it outright or save for it quickly.

It just is too easy to get in the trap of credit and reasoning it out is the first indication you have a problem. If its important save for it, if you cannot save for it get credit counseling

A.) You can't over-draw a credit card, and get hit with overage fees or bounced-check insurance, or all the other things banks do - particularly with the slightly nefarious way they often choose to order your transactions when they close their books. Particularly troublesome with businesses that put in a hold on your card, then charge you the actual price, and then refund the hold (like many fuel stations)

B.) If you don't get paid weekly, and instead biweekly, monthly, or more sporadically than that, putting all spending that doesn't absolutely have to be drawn directly from your checking accounts on credit makes a huge amount of sense. You can float that tank of gasoline, or your groceries on credit, but when the heating oil needs to get filled, or the rent is due, you need cash in hand, and you don't want to get caught short. More of an issue if you're not paid very well to begin with and haven't got much cushion built up.

C.) Buy stuff on credit, collect the reward points, pay it off before the next statement, and you've gotten free money for things you'd have to buy anyway.

D.) If a credit card gets stolen and somebody goes on a spree with it, you just dispute the charges with your bank, they issue chargebacks, no real money is gone from your account. With a debit card, good luck, they just vacuumed money out of your real checking account.

You can get all those benefits while still paying the balance in full each month and paying 0 interest, even using the time until the next statement as a free 30-45ish day loan.

It builds credit and increases your credit score.

When your credit score is higher you pay less in interest on loans. That means credit cards actually save you money if you are not carrying interest each month.

B) Don't live check to check. Keep track of your own finances.

C) And if you fail to do that once (because you're probably living check to check), you've nullified any free benefit you ever received.

D) Horseshit. I had my card stolen by the Target breach, there were charges on it all over Europe, and within a week I had every penny back.

Let's say that week happens to be the one when your rent/mortgage is due, your car payment is due, your student loan payment is due, etc. It doesn't matter that the money goes back into your checking account eventually, if it's not there when it needs to be, you get hit with overdrafts, bounces, late fees, marks against your credit history. Those aren't things you can just "opt out" of.

Using a credit card is a useful layer of indirection and buffer.

edit: I guess keeping cash surplus to my immediate needs in a savings account is opting out?

I'm not saying some people are not irresponsible but real financial strain is a tough thing to get out of, especially when you were born into it.

Case in point. I had a two-week hotel stay and facility booking at a resort on my AMEX. The hotel fucked up and double-charged me for the event -- to the tune of $20,000. Due to their obtuse bureaucracy and overall stupidity, it took two weeks to get the issue resolved.

In the debit card scenario, I'm stuck with a $20,000 liability immediately upon the hotel screwing up. I don't keep a five-figure balance in my checking account, so that's a problem until I notice that this event has happened. (Which I may not, because I'm on the beach enjoying my honeymoon and not checking my mail).

With the credit card scenario, I get back from the event, open my mail and discover a $40,000 bill instead of a $20,000 bill. Nothing is bounced, everyone is paid, nobody is angry at me. I make one phone call to AMEX, dispute it as a double charge, and my risk (and work) is done.

If you had a bunch of things timed to be taken from a charge account, and you exceeded your credit limit because some sort of fraud or double charging happens, identical chaos would ensue.

edit: and there's certainly not a vast difference in carrying $20K of credit and $20K in cash. We live in a world of negative interest rates.

The problem is errors are random so your 'solution' is to keep huge amounts of cash in your checking account to deal with random error.

But, if I max a CC I would still have the cash in my checking account to pay other bills. If I don't have a CC and my checking account is empty I am going to have issues paying rent etc.

PS: Think of a CC as a financial firewall. You still need the cash to pay your bills, but keeping a redundant CC with an unused 15k credit limit is cheap.

Personally, I don't auto-pay everything. Stuff like sales tax, utilities (power, gas, water, cable), insurance, parking, car payments that isn't variable.

Here's an example. Buy a laptop from ebay. Pay with debit card. Seller ships a brick in a laptop box sends via Fedex. You sign for the package, open the box, realize it's a brick. You dispute the charge with your bank. They are nice so they provisionally give you a credit. They call the sender. Sender says "I have a tracking number, he signed for it, he's lying, I sent him a working computer." You lose this dispute. The bank tells you to sue him in small claims court.

With a credit card, as long as you dispute before you pay the bill, the dude doesn't get paid, and you don't get charged. Once you pay, your rights are diminished.

I'm not saying this to be aggressive, but you're missing something in the calculation. http://www.investopedia.com/articles/03/082703.asp

If you use a debit card now and are use to paying in full you are leaving literally hundreds, if not thousands of dollars per year on the table in free money by not using a credit card.

It's essentially the bedrock of the modern financial system.

How would that work? With banks in the UK, you can either say (1) let the charge through, in which case they will charge you "unapproved overdraft fee" or something, or (2) reject the charges, in which case they will charge you "unpaid transaction fee" and not pay the bill (which I think is a crime, because they're literally charging you for nothing - as they didn't deliver the service (pay the charge)), in addition the company that issued the request will charge you a fee as well.

I can only hope that elsewhere, regulations are a bit more sensible so that there is no potential for this kind of abuse.

Card issues make crazy amounts just in the transaction fees merchants pay, they have no reason to dis incentivize people from using them for as many purchases as possible.

My bank's electronic bill pay automatically pays my full credit card bill, every month, without fail. It's been doing that for at least a decade IIRC. Is this that unusual?

Suppose I have utility = log(consumption), but my income is volatile. If I have 1 income in year 1 but 10 income in year 2, and use no credit, my utility is log(1)+log(10) = 2.3.

If I use credit, I can have utility log(5.5 / (1+r)), with r the interest rate. At 10% interest, that's 3.2. At 20% interest that's 3.0. At 50% interest that's 2.6.

So even at 50% interest I'm increasing my utility by 10% due to the use of credit.

I think so because I doubt that most people (regardless of how good they are at math) can trust their current selves to compare utility from consumption to disutility from having to pay back (meaning that their future self will often disagree strongly with their current self.) This is not to say that someone else should be trusted with decisions about savings and loans other than the saver/borrower (forcing someone to put money into a pension fund on the grounds that they're irrational and then not really paying the pension back is a bit too common for my taste), just that "by default, don't get into debt" is good advice.

More generally, IMO quite often clever utilitarian maximization works worse than simple rules designed to keep you out of trouble first, and seek "utility" later. (I guess I don't quite believe in people being utility-seeking machines, not to mention ones having stable preferences, nor do I believe that a person is truly better off having achieved more utility per unit of time.)

I realize it's not a satisfactory argument, of course, if one does believe in utility maximization as a good way to think about these things, and I really wish I could back this up so it's more than a hunch...

Correct idea, incorrect math. The optimum is found with (11+r)/(2 + 2r) consumption in year 1 and (11+r)/2 consumption in year 2, for a total utility of 2 log(11+r) - 2 log(2) - log(1+r); at (10%, 20%, 50%) interest rates this yields (3.33, 3.26, 3.09) total utility.

Key idea is that since utility is concave, smoothing it out is a win. Now just trade off the gains from smoothing against the losses from financing, and you are golden.

Concavity is a way of formalizing this intuition; it means, roughly speaking, that f(2x) <= 2f(x).

Econ uses log(x) as a simple model, but the same idea would apply to any convex function albeit with different arithmetic.

This is however an argument for poll taxes (e.g., "every adult must pay $1000") being unfair, as well as sales taxes on inferior goods (warning: technical term) if the regressive effects aren't compensated by a quasi-fixed-dollar tax rebate.

And you are saying that the last 5% of a millionaire's income has the same utility as the last 5% of a different person's income that makes 25k/year?

Note that this assumes that you are already able to spend an optimal amount on food.

If I gave you the choice of only eating $1 of Cup-Noodles every day for 30 days ($30 total), or one single $300 meal at a high class restaurant, and nothing for 29 days, which is the smarter choice?

Shortening the time period just lowers the financing costs.

So it would be very reasonable to take out a loan for a car or a house, especially with interest rates around 4%. It might even be reasonable to take out a loan for furniture or a TV, but fiscally responsible people will usually have enough cash to pay instead, so in practice most responsible people don't take out loans for TVs.

By the way, houses historically did not appreciate at high rates. The recent dramatic appreciation in housing prices in big cities is a giant blip in the data. You shouldn't bet on housing appreciating so well, and you shouldn't buy more house than you will use or rent. (If you think the increasing importance of big cities will automatically mean higher prices, ask homeowners in Tokyo how well that's been working for them.)

In 2014 only 34% of households carried credit card debt month to month[1]. The majority of households pay it off every month, simply using it to smooth out irregular cash flow while potentially racking up rewards. They're not purchasing an asset, per se, unless you count the rewards and the tiny amount of bank interest they may receive.

[1]: http://www.creditcards.com/credit-card-news/credit-card-debt...

[1] I have a card that gives me 5% cashback in gas, groceries, and books up to a limit that does not often surpass what I spend and some rotating 5% cash back cards, in addition to a 2% general spend. I do not pay any annual fees for using the cards.

If you only use the card to spend $100/week on Groceries, you get $312 in cashback rewards. Subtract the $75/yr fee, and Amex paid you $237 to use their card that year.

(Amex isn't the only card like this -- there's lots from MasterCard and Visa as well. This card in particular just happens to be one of the rewards cards that I know the details of.)

Depending on agreement, card type, and other factors, the swipe fee is sometimes higher than 2%, so I don't always get all the difference back.

But unrewarded cards aren't really any different. Most merchants still have to pay the same high fee for them. Since the bank/processor is going to take the maximum amount of money they can regardless, and most merchants will have to pay that full fee regardless, you might as well use a rewards card over an unrewarded one.

American Express cards offer the best rewards, but the cost to the merchant is much greater. Many shops or restaurants don't accept AmEx, and sometimes those that do will say they prefer you to use an alternative card.

But within one network, I think it's correct that the cost is the same regardless of the card's promotion.

The page you linked to shows that even the events of 2008-2009 didn't set people back from expanding their personal debt, which is surprising to me. Given our fairly short history with widespread revolving debt, we might be setting ourselves up for another, bigger, debt crash that the government won't be able to bail out.

Of course, revolving debt does have a longer history than that, but it was often used as a "barely-there" facade for stealing money from the poor, e.g. coal miners living in a company town weren't paid enough to buy food at the company store, so they ended up in life-debt to their supposed employer. Of course, in that scenario, the company made money even if the coal miner died without paying them back the full amount they owed. These days, companies trade consumer debt like it's real money, and get in actual trouble when the music stops.

[1]http://www.creditcards.com/credit-card-news/credit-cards-his...

The page I linked, under the heading "Transactors versus revolvers," presents a chart that shows the percentage of households with revolving debt declining from 44% in 2009 to 34% in 2014. A 22% decrease over five years is rather significant, no?

I imagine it is still a huge amount in absolute terms.

If you're using it to buy an asset that appreciates more than the interest on the debt, what makes you think that you're a better judge of asset prices than the people lending you the money? Why wouldn't they just buy the asset directly, and cut out the middleman?

Businesses use debt for all sorts of reasons; cash flow, tax, paying out profits in a different form, or simply because debt is cheaper than equity.

Because it's not their (core) competency or they don't want the risk.

I could start my own company printing indie games. But I have no connections in the industry (well, not entirely true, but none that are exploitable for this), I have no experience running a business, but I do have capital. And someone else who does have those connections and experience wants to start up such a business. Collateral on the loan protects my money (partially) in case of failure to repay, while the risk is mitigated by having someone more experienced doing the work.

Point being my rationale was slightly different; it includes more things - it's more general - and it's a bit more negative on the idea of simply buying a rent producing or appreciating asset.

The reason is: They don't need it. They want income, not assets.

Let's see, why doesn't Bank of America just buy millions of houses rather than lending out mortgages?

1. They don't need and don't have the manpower to maintain millions of houses.

2. Empty houses owned by the bank are not as valuable as houses with people living in them. If the bank owned every house in a neighborhood, nobody would want to live there and their value would drop.

3. They get to shift some of the risk to the person taking out the loan. If the value of the house drops, the borrower is still on the hook for paying the original amount (up to a point, unless they're willing to go through bankruptcy). So they don't get as much upside, but they have less downside too.

I'm sure there's other reasons as well.

Businesses use debt in all sorts of ways, they certainly don't limit it to buying assets. A common use recently is to fund share buybacks which is essentially an easy way to engineer higher earnings per share and make investors happy (but not providing any actual income). Another common use is commercial paper markets which corporations use for short term obligations (payroll!) and to smooth out cash flows, this is actually pretty similar to a credit card on a personal scale.

I mean if I want to ship something, Fed Ex will ask for payment up front but when Amazon.com ships something they probably don't actually send the money right away. I am still trying to grasp this concept credit terms. I must add that I have had no training in this field and have basically just skimmed through the soylent blog post

http://blog.soylent.com/post/133420708272/pricing-soylent-ef...

so in my mind, what we want to do is get the "interest-free loan" from our supplier of equal or greater duration to the credit term we give our customers.

I imagine this is a double whammy because suppliers offers better terms when the going is good and become strict when the going gets bad. Now that I think about it, perhaps Apple sitting on a pile of cash isn't such a bad idea after all right? I mean if they have to go through a rough patch again, won't any credit terms they get (banks, investors, or suppliers) automatically be worse? I don't know the rules about financial stuff but my perception is that as public companies there is only so much information you can withhold (and only for so long) without breaking financial regulations (and those regulations presumably exist for a good reason).

Yes, it is. In both an accounting sense, and a legal sense.

"I mean if they have to go through a rough patch again, won't any credit terms they get (banks, investors, or suppliers) automatically be worse?"

Yes. It's a standard death-spiral path for a company to be viewed as unable to pay their suppliers, and thus becomes unable to generate revenues. The way out is usually some sort of senior or secured (ie collateralized) debt.

I don't know much about finance so for anyone else like me I'd like to point out that this is not a typo.

> In finance, senior debt, frequently issued in the form of senior notes or referred to as senior loans, is debt that takes priority over other unsecured or otherwise more "junior" debt owed by the issuer.

https://en.wikipedia.org/wiki/Senior_debt

> What is 'Senior Debt'

> Senior debt is borrowed money that a company must repay first if it goes out of business. Companies have a number of options for obtaining financing, including bank loans and the issuance of bonds and stocks. Each type of financing has a different priority level in being repaid if the company decides to liquidate. If the company goes under, the holders of each type of financing have different levels of rights to the company's assets.

> If a company goes bankrupt, senior debtholders, who are often bondholders or banks that have issued revolving credit lines, are most likely to be repaid, followed by junior debt holders, preferred stock holders and common stock holders. Senior debt is secured by collateral, and that collateral can be sold to repay the senior debt holders. As such, senior debt is considered lower risk and carries a relatively low interest rate. Even though senior debtholders are the first in line to be repaid, they will not necessarily receive the full amount they are owed in a worst-case scenario.

http://www.investopedia.com/terms/s/seniordebt.asp

I'm sure there is more to this topic than what I've pasted above. Off the top of my head, I can imagine it is unlikely that the courts would just accept that a company going bankrupt got a super senior loan from the chairman's wife if there is no book keeping that the money actually went into the company and was not a ploy to defraud the actual lenders. I think any lender can take the debtor to court if they suspect malice (This is just my hunch.)

Yes, you got it :-) Although it doesn't always work in practice. As a small business, I have a UPS account with net-7 terms (they bill me once a week).

This is not normally considered debt, though. It's a liability, but there is no formal loan agreement. I may have a customer push payment out to 90+ days and I end up getting the same amount as if he had paid me within 30 days as agreed. So if UPS charges me $100 to send them an item overnight, but they don't pay me the $5,000 for that item for 3 months, I still have to pay UPS within 7 days.

They might ask for payment up front, but they'll quite happily take a credit card instead. Yes, credit cards are a form of transactional debt if you pay them off each month; they allow you to enjoy your purchases for ~ 1 month before paying for them.

I didn't think about that. So essentially, the credit card issuer didn't really spend "their money" at all. Wow. The more I learn the more I realize how little I know.

Afterwards, if you do a chargeback, the bank will yank back the funds from any other amounts the bank owes the merchants, but if the merchant has enough proof the cardholder participated in the transaction (aka, swipe and sign, or chip and sign, or use of CVC code online), then the bank will give the money back to the merchant. The bank still takes $30 or so from the merchant as a fee for getting a chargeback though, but I'm sure that amount and terms vary from merchant to merchant, depending on their purchasing power.

A friend told me about this case where a vendor charged his American Express twice. They called the vendor about this and the vendor yelled at him so he called American Express for a charge back. Apparently, American Express went in and did a charge back for the whole amount. I am glad they did the charge back but it must suck for a merchant if the charge was legitimate and the customer was being a jerk.

You don't think buying a stake in a successful company (in this case one that happens to be your own) is buying an asset? The mechanations are slightly different, but you're still buying shares. An effect is rising EPS (due to retired shares), but that isn't the purpose.

   but that isn't the purpose

Putting aside the executive giveaway (because I have a hard time believing that there are executive bonuses so intertwined with EPS that the company can just burn money on buybacks to increase that bonus without any external fuss or anyone questioning why)...

...who or what else matters beyond the shareholders?

Share buybacks aren't a scam. They exist as a method to return capital to shareholders and can be smart or not depending on a variety of financial circumstances. Just like every other financial decision.

http://aswathdamodaran.blogspot.ca/2014/09/stock-buybacks-th...

Here's a simple example to illustrate: you have an interview tomorrow, and you want to buy a suit to be sure you are appropriately dressed for it. The net-present-utility of the suit is quite high -- not having one may cost you the job opportunity. On the other hand, a suit is a depreciating asset. It is also not an income-generating asset (i.e. you may sell the suit the day after the interview at no loss of income.)

Using the reasoning of "debt for appreciating/income generating purchase" will preclude you from buying this suit, sensible though the purchase is.

PS: in an ideal world, you'd rent the suit, or any asset that has only temporary utility and pay depreciation+premium. http://john-joseph-horton.com/papers/sharing.pdf

http://www.investopedia.com/terms/i/irr.asp

http://www.investopedia.com/terms/n/npv.asp

Unless you take some utility of the appreciating asset, you should always go for the best investment.

One exception: Credit cards with those introductory "6 months interest free" clauses. Sign up for as many as you can get, with as large a limit as you can get. Max them all out on payments into a mortgage offset account. Just before the end of the interest free period, pay them all off again. (I've heard of this being done but I'd bet it's a lot harder to pull off these days.)

Working out what the cost is going to be up front only works if you stick to your assumptions throughout repayment, which is a good way of understanding part of the problem with debt - even if you calculate properly against uncertain events for the average case, you as an individual can be caught out by bad luck.

Attempting to subsequently solve the consequences of your bad luck with further debt seems to me an instance of the gambler's fallacy [1], and is another important part of the problem with debt.

[0] https://news.ycombinator.com/item?id=11135283 [1] https://en.wikipedia.org/wiki/Gambler%27s_fallacy

Back to monthlies, the big ones are non negotiable and those revolve around your housing. For many the mortgage or rent will be with them for years. So pile on utilities and then comes nearly the near optional monthlies.

You get your phone, your internet, your various streaming sites, and more. Then toss a car, credit cards, and then more.

How to spot these people, look at ones who shop cars based on what kind of monthly payment they can squeeze up too. If they went over four years its a bad sign, if they went six plus, well end of story.

Oh, one last note. Track your food purchases, all of them from grocery to on the go. You might be surprised

From experience (not mine) too many people consider only one factor when making the majority of purchases with credit:

Can I make the monthly payment...?

If they can they plunge headlong...

Of course just paying the monthly minimum on outstanding credit card balances is disastrous...it's kicking a loaded can down the road...