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Can you handle a credit card?

Financial expert Carmen Wong Ulrich says credit cards aren't bad -- until you start looking at them as free cash.

Tess Vigeland: So every time we talk about credit cards on this program, we get letters from two listener camps. One argues no one should use credit cards EVER. No way. No how. Evil incarnate. The other says, Hey, stop vilifying credit cards. Cards don't get people into debt -- people do!

Well, we're going to revisit the issue today with our friend Carmen Wong Ulrich, author of "The Real Cost of Living." Welcome back!

Carmen Wong Ulrich: Thank you Tess. Thanks for having me.

Vigeland: So given all the news lately, do you think it's a wise decision to switch over from credit to debit? I mean, what are the real benefits of using debit over credit?

Ulrich: I'm a fan of the other way around -- of actually using credit over debit. I just don't think credit cards are evil in and of themselves. And actually, the majority of Americans -- 80 percent of Americans who use credit cards have no trouble with credit cards and don't carry a balance.

Vigeland: Wait a minute, I'm going to stop you there. Eighty percent of Americans don't carry a balance?

Ulrich: Exactly. But the ones who do carry a balance, carry an incredibly high balance. So that really skews the numbers.

Vigeland: But it sounds to me like the real kicker there is that you have to be actively paying attention and actively managing your credit card. I mean, at least with a debit card, there aren't as many fees. And in fact, the banks have started backing off that recently. But boy, you can rack up interest charges, you can rack up all kinds of fees with credit cards.

Ulrich: Sure.

Vigeland: So you really have to pay attention.

Ulrich: Yes. I always say to folks, you know, what it comes to this question, know yourself. Are you someone who's going to carry a balance? Are you able to spend within them? If not, then don't use credit cards. I recommend to build credit than just rotate a couple of cards and use them for only one specific thing. For example, use a gas card just for gas. But make sure that you have these limits on yourself if you know you're not going to be able to handle it.

Vigeland: All right, let's get to my main question, which is one that listeners write in quite often about, which is how many credit cards is kind of a good rule of thumb? Is it a good idea to have multiple cards?

Ulrich: There's no magic number, but I always recommend folks at least have two or three credit cards. A lot of your credit report and credit score is based on length of credit history, but also how much credit you have available to you versus how much you're actually using. So let's say you only have one card and it has a limit of $10,000. You have $3,000 in expenses a month. You have pay it off in full, but that card looks like that it's almost 30 percent utilized. So that's dangerous, because it makes your credit score go down.

Vigeland: But then again, you just have to be careful that you're not staring at that thing in your wallet and going, "Well, maybe I can put a little something on there..."

Ulrich: Tess, you're talking about yourself here, aren't you?

Vigeland: No, no!

Ulrich: This is the thing: You have to look at credit cards as financial tools for emergency and for use to build your credit, for the perks that can come with it. But the second you start carrying the balance, they turn into a bad thing.

Vigeland: Yup.

Ulrich: With this economy, with this job market, it's not a bad thing to have as much credit at your disposal as long as you don't use it, should you find yourself out of work for an extended period of time, or should your find yourself needing to lean on it. Credit cards got distorted. They never should've been thought of as a tool to basically get great shoes, bags, you know, dining out -- whatever it is. Never should've been thought of as that.

Vigeland: You mentioned a couple of times that credit cards, one of the real benefits is if you can manage them well and then take advantage of a lot of the perks and the reward programs that are out there. But isn't it true that most of the cards that have rewards are also going to charge you some sort of annual fee for that. How do you balance that annual fee against the potential rewards?

Ulrich: Well, it depends on how much you use the card. Myself my example, my annual fee is $45. Now, they keep on sending me notices to upgrade to another card that has more perks, but costs 10 times that a year. I have no use for that. You really need to know yourself and your credit behavior to know if you $75 or $150 or $450 -- when does it make sense to make that annual fee and that annual payment? When you talk about when you swipe, that vendor, they were getting charged quite a bit on debit cards. But they also get charged more when you swipe a reward card. So it's just something to keep in mind if you know a small business owner and you're close with them, maybe you wanna spare them that 12 percent fee or whatever it is that they get to pay for the rewards that you get. It's a very, you know, interesting system.

Vigeland: All right. Carmen, thanks. It's good to talk to you again.

Ulrich: Thank you Tess.

Vigeland: And if you want even MORE arguments for and against both debit and credit, we've got 'em on our Makin' Money blog.

About the author

Tess Vigeland is the host of Marketplace Money, where she takes a deep dive into why we do what we do with our money.
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Ms. Ulrich said: "...maybe you wanna spare them that 12 percent fee"

Close but no frequent flier miles; off by a factor of ten.
Merchant fees average 1.3%

see: New York Times 16 Dec 2010
(http://www.nytimes.com/2010/12/17/business/17fees.html)

and a $45 annual fee is still too high. There are many reward cards with no fee

I respectfully disagree with the statement "You have to look at credit cards as financial tools for emergencies and for use to build your credit, for the perks that can come with it". When someone has an emergency the last place they should turn is to a credit card. This is just the beginning of a slippery-slope of interest charges and stress trying to make new monthly payments.

As far as proving credit-worthiness, I use eCredable.com. eCredable allows me to report ALL my payments including my cell phone, electric, even payments made to my daughter's daycare. It sure beats a FICO credit score that is only based on debt products and available credit. An interview I had with eCredable's CEO really opened my eyes and I learned that a creditor that would use a FICO score is required by law to consider a 3rd party verification of all payments. That's pretty cool!

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