Safely Using Credit Cards As Cash

It is easy to get in trouble with a credit card. You buy something now and think you have 30-45 days to come up with the cash to pay it off, or worse, you think you can pay it off in just a few months. Before you know it, you have thousands of dollars in credit card debt and you are paying 20% or more in interest. No wonder so many financial advisers recommend you shred your credit cards and go with cash and debit cards only.

There is a way though to use credit cards responsibly and come out ahead. But why even consider it? What is wrong with cash and debit cards?

The problems with cash are obvious. First of all, you cannot use cash online. Second, in the real world, carrying massive amounts of cash is risky and dangerous.

Doesn't the debit card fix all of that though? It allows you to carry your entire bank account with you safely and use it online as well. Not so fast. Debit cards have a number of problems. These include, but aren't limited to:

• Unlike cash, debit cards often allow you to spend more than you have. Your bank will happily allow this, and ding you overdraft charges every time you do it.
• When using a debit card, funds are often "blocked" which means at the time you swipe it, a rough amount of your cash is held regardless of the transaction. Gas stations, for example, may put an immediate hold on your account of $75 even though you only got $50 of gas. The $50 will be withdrawn usually by the end of the day, but the $75 block may not get removed for 72 hours. That is your money you cannot use! Hotels do the same thing, but it is even worse. Say you are going to spend 3 nights in a hotel at $100 per night. They will block $300, plus as much as $150 more for extras like movie rentals, long distance phone calls or the minibar. That means you have $450 of your cash tied up. Three days later you check out and the total bill is $320. That is removed from your account the same day, but the $450 hold stays for up to 72 hours. That means temporarily, your $320 hotel stay is tying up $770 of your cash. Unless you have a lot of money in your account, that is enough to cause a bounced check. The bank assumes the blocked funds are not there and will not let that money be used for clearing checks.
• Fraud protection is usually much less on a debit card than a credit card, and even if you get 100% of the stolen funds back, it isn't immediate. If someone puts a false $500 charge on a credit card, you can dispute that with the credit card company and until the issue is resolved, the amount isn't your responsibility. If the same thing happens with a debit card, you are out $500 until the bank decides to put it back in your account. If you report debit card fraud within 2 days, you are usually limited to $50 in the US, but wait 3 days and you are now liable for as much as $500 for fraudulent charges. Better watch your bank account daily to ensure nothing is going on!
• If a merchant makes a mistake and withdraws too much, that money is gone until you get the problem resolved. That could take days or weeks. Think that can't happen? Ask George Mack who had $2,300 withdrawn from his bank account because an Arco computer screwed up when he got $54.70 of gasoline. It took at least 48 hours to get resolved and that was with some local media coverage. Note the bank allowed the transaction to go through even though he only had $1,000 in his account. No word if the bank refunded overdraft fees.

Bottom line for me is I never ever use a debit card. They are way too risky.

So, how do you use a credit card like cash? It is really pretty simple, but you'll need a few things. First, you need some way to track your expenses fairly close to real time. You can do this manually on a spreadsheet like Excel, in a financial program like Quicken or online at a site like Mint.com. Regardless of how you do it, check your transactions daily. Yes, daily! Make it part of a morning ritual. Get up, check email and download the latest credit card transactions. You will get a feel for how much you are spending on gas, groceries, dining out, movie tickets, clothes and more very quickly. You'll also never have a month end statement surprise.

The next thing you need is another bank account, and it will need to be linked to your checking account. I love ING Direct for this. It has great interest rates compared to the competition, and allows you to open many accounts for free. I have an account there for property tax, savings, insurance, income tax and more. I also have one account there for each credit card I use. Here is how it works.

At the end of each week, I total up all of the charges for each credit card that week and transfer that much cash to the ING savings account associated with it. You can call the accounts whatever you want, so I just call them VISA and Amex. Then, one week before the statement is due, I transfer the statement balance back to my checking account and write the check. You may also be able to have your credit card company directly debit your ING account, saving you a step.

This does several things:

• You get a great handle on your daily and weekly expenses.
• You tend not to overspend since you are thinking that whatever you put on the card with this next transaction will come out of your bank account within 4-5 days.
• You are always current on your credit cards. Even if you pay your statement off every month, you aren't really current. Here is why. Let's say you spend $500 a week, and your credit card is $2,000 per month. If you pay your June 30 statement off on July 15, two more weeks have passed, so now you have $1,000 more on your credit card. Can you pay that off right now if you had to? You should be able to. What if you lost your job? You can't pay a $1,000 bill in 30 days if you have no funds coming in. With this method, you could, because in that two week period, you'd have transferred $1,000 to the ING VISA account.
• You earn interest on your weekly spending. Yeah, as I write this, interest rates are at 1% or so at ING, which isn't great, but depending on how much you spend, you can earn $10, $25, $50 or more each year even at these rates.
• You earn all of your credit card perks, be they airline miles, cash back bonuses or whatever. There are no such things with a debit card.

Some of you may see the similarities to the envelope system of using cash. It is very similar, just electronic, and there are no wads of cash laying around.

This system can be tweaked for routine monthly charges too. If you put your $100 cable/internet bill on your card, just add $25 to each weekly transfer to spread it out.

You should be able to do this with a number of banks, but ING Direct makes it drop dead simple to open multiple accounts for such purposes. If you don't have an ING Direct account and would like to try this, let me know in the comments below. I can send you a referral link that will earn me $10 and you $25 if you open an account with a $250 deposit, which may be one week's worth of credit card charges.