Credit cards vs. Debit Cards

[jpg7n16]

Remember your the one who thinks debt doesn't have risk.

That's exactly right I am.

Stocks have risk. Bonds have risk. Gold has risk. Irresponsibility has risk. Real estate has risk. Mutual funds have risk. Life has risk.

Debt has no risk. It just sits there. It's very predictable. Simple calculators will tell you how much debt you have, what your payments are, how long before the debt is gone, and what your balance will be at any given point. Debt is a known.

And certain types of debt give you rewards you can't get with cash - aka credit cards. Charge on card, get rewards, pay card off. Yes rewards. No interest charges.

Any negative impacts of credit cards are not the result of debt. They are the result of financial ignorance or financial irresponsibility. Or both. Where someone truly didn't understand just how much CC interest charges you. Or wasn't responsible enough to pay their bills on time. Or had a mistaken belief that you're supposed to carry a balance on your credit cards. Or was irresponsible and took on more debt than they could afford. These aren't the result of debt, they're the result of honest ignorance or plain irresponsibility.


So when someone takes out a bunch of debt and invests it all in real estate - don't blame the debt for losing them money. Blame the real estate market - cause that's where the risk was. The debt had no risk.

A mortgage holder whose house is upside down isn't experiencing a risk of debt. The debt owed is exactly what they expected to owe at that point in the loan. The debt didn't change. It didn't cause the house to go down in value. The debt didn't do anything - except charge what it was supposed to charge.

Upside down houses are the result of real estate market risk.

I'm done with this thread.

[littleroc02us]

JPG I already pointed out that there are no taxes on losses to littleroc, but he didn't address it. Said i was "hypothetical." Fact, not hypothetical.

Second, I pointed out that cash buyer has to sell home and rent, again it will not be 100 months but say 60 or less depending on rent. Not to mention it won't be $150k because the cash buyer has to pay to sell his home in a depressed market, so they have to list immediately. They can't afford to wait.

Littleroc doesn't understand basic math, basic taxes, basic budgeting period. Probably because he's never owned stocks and investments so actually paying taxes on stocks doesn't comprehend. Also with losses you can rollover losses but that's another conversation.

Another guy who hates me because I don't believe in his ways. It's funny how know one can break down the math for both buyers? All they can do is continue to bash me, when they don't have the solution. This is a forum full of very childesh people. Dude your pathetic to say that I don;t understand taxes, math and budgeting. You have no credibility either.

[littleroc02us]

Redo your scenario where the mortgage investor invests his $160k remaining cash in gold, or bonds, and we'll see who comes out ahead. Use the same timeframe.

Try the Fidelity Bond index: FBIDX Fidelity US Bond Index, mutual funds, quote, price - Morningstar (2006, mid $12k's 2008, mid 14k's = +16%)
Or GLD: GLD SPDR Gold Shares, etf, quote, price, shares - Morningstar (2006, low 60's; 2008, around 90 = +50%)

Since you don't trust my math: 14,500/12,500 = 1.16 = 1 + 16%; 90/60 = 1.5 = 1 + 50%

Your scenario is completely dependent on which investment selection the investor made.

Which verifies that the loss of money was due to the market risk that he took by choosing to invest in the stock market, rather than in Gold, a bond index, or a money market fund. His loss had nothing to do with his mortgage.

In fact, if he took the mortgage, and took bond risk or Gold risk, instead of market risk - he would have roughly $185k or $240k, respectively - and be well ahead of your cash investor. (even ignoring the 5% bond yield he would have been earning on the bond fund)



You don't want to get into a math debate with me. Create another thread and you and I can debate over there.


Your main error in this thread isn't a math one, but a concept one. You are equating two coincidences and coming to the wrong conclusion.

It's like you say Mr. Smith has a CC with a $20k balance, and then he goes to Vegas on vacation and blows $250k gambling, and can't pay his balance. He can't pay his bills and files bankruptcy.

So you would say "He's bankrupt because he used credit cards." When in reality Mr. Smith is bankrupt because he blew all his money gambling.

You make similar statements above - where a person blows through all their money with irresponsible living (blowing money on vacations and forgetting to pay their bills on time), and the CC gets the blame for their poor financial condition. It's the wrong conclusion.

This whole thread has become immature and for you to have the gull to say "you don't want to get into a math debate with me" is pathetic and childesh. Grow up, that might be the funniest thing I've ever heard on this site. I refuse to respond to your threads from this point on because I have made my point with my scenario and I'm sorry it works, but you have lost complete credibility with my and I will question your advice. Remember your the one who thinks debt doesn't have risk. I'm done with this thread.

[LivingAlmostLarge]

JPG I already pointed out that there are no taxes on losses to littleroc, but he didn't address it. Said i was "hypothetical." Fact, not hypothetical.

Second, I pointed out that cash buyer has to sell home and rent, again it will not be 100 months but say 60 or less depending on rent. Not to mention it won't be $150k because the cash buyer has to pay to sell his home in a depressed market, so they have to list immediately. They can't afford to wait.

Littleroc doesn't understand basic math, basic taxes, basic budgeting period. Probably because he's never owned stocks and investments so actually paying taxes on stocks doesn't comprehend. Also with losses you can rollover losses but that's another conversation.

[jpg7n16]

You know what, this is getting out of hand. LittleRoc is super irriating to me. LR - If you want to discuss this further, create another thread. Sorry for the argument here. I hope you guys get back to what was really concerning Frugal...

[jpg7n16]

If you take the 106,664.02 (liquid investments) - $26,571.07 (Deduction and taxes) = $80,0092.95 which will last the 9 months. Yes you are actually right about the 41.55 months in total, but the cash buyer has around 100 months total. So thanks for proving me right again.
Somehow your awesome math forgot to mention the cash buyer. Nice try!

Congratulations. You just accounted for paying taxes on your investments in a loss position. Way to show me up.

Do you know how taxes work? You pay tax on income, not loss.

If you buy $160k worth of stock, and it's only worth $106k now, you don't owe any taxes on the sale.

And you say that $80,092.95 will only last 9 months. Come on guy - you can do better than that.


And again, you forget that once he sells the home, he'll have to start paying rent, so his monthly expenses will increase. You won't have 100 months. With a $1k rent, you'd have around 60 months. And you'd have sold your home.

The 60 months and 41.55 months are different because one took on market risk, and one didn't. The difference has nothing to do with whether they had debt or not.

[Frugal]

If I use my credit card at the store, for instance JC Penneys and Bon-Macy's, I simply turn around and IMMEDIATELY pay it off at the register. All I know is it helped me build an excellent credit score this way, that helped us when we bought our house not that long ago. I think most peoples' opinions of credit cards depend upon how their parents treated money, and the financial values they grew up with. My parents warned me about the dangers of credit. I don't think it is wise to say, as some have here, that just because you don't use a CC to pay for everything, you are not able to be "financially responsible". It's called, I KNOW MY LIMITS!

[jpg7n16]

Your wrong again, you seem to say stuff to make me look bad. I kept saying in my post over and over again a 2 year period from 2006-2008. Read it again. People can enter the housing market like I did in 2006 and start investing in that same year can they not. This post is just simply proof of a situation where the cash buyer wins. I know that upsets you, but it proves the risk involved with leveraging.

Redo your scenario where the mortgage investor invests his $160k remaining cash in gold, or bonds, and we'll see who comes out ahead. Use the same timeframe.

Try the Fidelity Bond index: FBIDX Fidelity US Bond Index, mutual funds, quote, price - Morningstar (2006, mid $12k's 2008, mid 14k's = +16%)
Or GLD: GLD SPDR Gold Shares, etf, quote, price, shares - Morningstar (2006, low 60's; 2008, around 90 = +50%)

Since you don't trust my math: 14,500/12,500 = 1.16 = 1 + 16%; 90/60 = 1.5 = 1 + 50%

Your scenario is completely dependent on which investment selection the investor made.

Which verifies that the loss of money was due to the market risk that he took by choosing to invest in the stock market, rather than in Gold, a bond index, or a money market fund. His loss had nothing to do with his mortgage.

In fact, if he took the mortgage, and took bond risk or Gold risk, instead of market risk - he would have roughly $185k or $240k, respectively - and be well ahead of your cash investor. (even ignoring the 5% bond yield he would have been earning on the bond fund)

DIDO!!!! I usually don't trust your math becuase you make it work in your favor and you cannot consider any other way, but yours.

You don't want to get into a math debate with me. Create another thread and you and I can debate over there.


Your main error in this thread isn't a math one, but a concept one. You are equating two coincidences and coming to the wrong conclusion.

It's like you say Mr. Smith has a CC with a $20k balance, and then he goes to Vegas on vacation and blows $250k gambling, and can't pay his balance. He can't pay his bills and files bankruptcy.

So you would say "He's bankrupt because he used credit cards." When in reality Mr. Smith is bankrupt because he blew all his money gambling.

You make similar statements above - where a person blows through all their money with irresponsible living (blowing money on vacations and forgetting to pay their bills on time), and the CC gets the blame for their poor financial condition. It's the wrong conclusion.

[littleroc02us]

[QUOTE=jpg7n16;289220]

I used your own numbers.

24,600EF / 2567.25 monthly exp = 9.58 months expense
+ 106,664.02 liquid investments / 2567.25 monthly exp = 41.55 months expenses <---- this is the part you forgot to consider
Grand totals: 131,264 available to live off for 51.13 months, before being forced to sell the home

Actually there is a change in my math, the 20k I mentioned as principle from the Roth IRA is wrong it's only $13000 because that is what was left after the market tanked so that only gives the mortgage buyer 5 more months, which puts him at 15 months. So in order to live another 9 months to make it 2 years he would have to take out another $26,571.07 to cover the expenses and the taxes. If you take the 106,664.02 (liquid investments) - $26,571.07 (Deduction and taxes) = $80,0092.95 which will last the 9 months. Yes you are actually right about the 41.55 months in total, but the cash buyer has around 100 months total. So thanks for proving me right again.
Somehow your awesome math forgot to mention the cash buyer. Nice try!

[littleroc02us]

[QUOTE=jpg7n16;289220]No you didn't use a 2 year time limit to show the hit, you used it to make a scenario end in 2008, where the numbers would look the worst for a mortgage investor. If you began your little 2 year scenario in 2008, it'd show a completely different result. This is evidence of the market risk I wrote about in my last post. This has nothing to do with 'debt risk', and everything to do with market risk.


Your wrong again, you seem to say stuff to make me look bad. I kept saying in my post over and over again a 2 year period from 2006-2008. Read it again. People can enter the housing market like I did in 2006 and start investing in that same year can they not. This post is just simply proof of a situation where the cash buyer wins. I know that upsets you, but it proves the risk involved with leveraging.

As is very apparent, I never trust your math. There's always some kink in the works where you conveniently forget something that lets your preferred method have some crazy advantage.

DIDO!!!! I usually don't trust your math becuase you make it work in your favor and you cannot consider any other way, but yours.

[littleroc02us]

Littleroc your math on the mortgages is off. In a bad market, the cash person would run out of cash faster and need to sell their home which dropped. Stock market dropped 35%. But you would need money for taxes, insurance, etc on a home anyway. No job = no line of credit.

Now then the mortgage person could sell their loser stocks and keep up with their lifestyle. Assuming a 50 month window and there isn't a recovery sooner, then they'd be set. The cash person would need a job because to sell a home at $150k will still cost $15k out of pocket.

Don't they have to pay commission? So that would cut into their savings. Then they'd still have to rent a place, but now they would walk away with $135k + investments. And they would put the house up asap, because I know and you know in a bad housing market it won't sell within 6 months. So they had better hurry.

Also you only pay 15% tax on earnings so the stocks lost 35%. So it'd an actual tax break on the sale of these investments. The purpose of the cash for the paid for home IS to pay the mortgage if you lose your job.

Bottom line...I think you are completely missing the point about why someone who had the common sense to save $200k, wouldn't cash it in and be surviving in their house longer than the cash buyer who NEEDS to sell their house in order to survive.

Second, you never responded to how my mom uses a CC for TONS of airmiles and yet her overanal self just always pays it off asap. So how can she ever get into trouble? She basically treats it like a checking account, constantly paying it off. The bill comes and it's $0. But she earns every rewards and has never had a late fee or interest (neither have I in 20 years).

So where is the risk for her? She has a checking account register and knows to the penny she can spend X amount. But she isn't about to pass up free miles.

If you say my math is off then show me, just don't tell me without any form of mathematical data. I used a mortgage calculator and a compound interest calculator. My math isn't wrong so prove it. The point of this post is that borrowing money and investing it during down times can be very risky and I proved it.

[littleroc02us]

[QUOTE=disneysteve;289219]This has nothing to do with credit cards but I'd stop right there. A couple earning 60K shouldn't have spent 200K on a house. That was not a responsible purchase.

Why, it's only 30% of their income?????

[LivingAlmostLarge]

Littleroc your math on the mortgages is off. In a bad market, the cash person would run out of cash faster and need to sell their home which dropped. Stock market dropped 35%. But you would need money for taxes, insurance, etc on a home anyway. No job = no line of credit.

Now then the mortgage person could sell their loser stocks and keep up with their lifestyle. Assuming a 50 month window and there isn't a recovery sooner, then they'd be set. The cash person would need a job because to sell a home at $150k will still cost $15k out of pocket.

Don't they have to pay commission? So that would cut into their savings. Then they'd still have to rent a place, but now they would walk away with $135k + investments. And they would put the house up asap, because I know and you know in a bad housing market it won't sell within 6 months. So they had better hurry.

Also you only pay 15% tax on earnings so the stocks lost 35%. So it'd an actual tax break on the sale of these investments. The purpose of the cash for the paid for home IS to pay the mortgage if you lose your job.

Bottom line...I think you are completely missing the point about why someone who had the common sense to save $200k, wouldn't cash it in and be surviving in their house longer than the cash buyer who NEEDS to sell their house in order to survive.

Second, you never responded to how my mom uses a CC for TONS of airmiles and yet her overanal self just always pays it off asap. So how can she ever get into trouble? She basically treats it like a checking account, constantly paying it off. The bill comes and it's $0. But she earns every rewards and has never had a late fee or interest (neither have I in 20 years).

So where is the risk for her? She has a checking account register and knows to the penny she can spend X amount. But she isn't about to pass up free miles.

[jpg7n16]

Are you sure you read the post, I showed how much he would have to take out of his EF, Roth and investments, it's all there and the math. I was using a 2 year time limit, because it shows the huge hit a mortgage borrower takes vs. the cash guy. And the point is in how much money the mortgage buyer would have lost vs. the cash buyer and the sustainability, plus the cash buyer could sell his house for 150k and have that to live off of, whereas the mortgage guy only had 49k left and that's it. Do realize that is all he'd have because his mortgage is under water. So I'm not sure where your getting these numbers, but their incorrect. Show me correction in my math then.

No you didn't use a 2 year time limit to show the hit, you used it to make a scenario end in 2008, where the numbers would look the worst for a mortgage investor. If you began your little 2 year scenario in 2008, it'd show a completely different result. This is evidence of the market risk I wrote about in my last post. This has nothing to do with 'debt risk', and everything to do with market risk.


As is very apparent, I never trust your math. There's always some kink in the works where you conveniently forget something that lets your preferred method have some crazy advantage.

I used your own numbers.

24,600EF / 2567.25 monthly exp = 9.58 months expense
+ 106,664.02 liquid investments / 2567.25 monthly exp = 41.55 months expenses <---- this is the part you forgot to consider
Grand totals: 131,264 available to live off for 51.13 months, before being forced to sell the home

Ta da! Mortgage holder is in a much better position to weather the spell of unemployement, without upsetting his life.


The risk isn't just in losing money - it's also in forcing your family to sell their home and move, at a time when the real estate market is at a low. The mortgage investor has the liquidity to wait it out, and let home and market prices rebound.

You seem to ignore liquidity risk. The cash purchaser has little liquid assets that are quickly exhausted, the mortgage holder has ample liquid assets.


And you went back and edited to show how when he sells the home at $150k, he'll have 100 months to live off of right? There's always something you forget. They don't get to live rent/mortgage free after they sell their home.

I will never trust your math.

So you as an investor would have kept the money in a money market instead of the possibility of getting better returns in the stock market. Is that really how you invest? I made the comparison apples to apples except how they paid for the mortgage.

It doesn't matter how I'd invest- and that's not the point. You are mis-identifying where the real risk came from.

An investor could have invested in a money market fund and not been at risk of losing 35% from 2006 to 2008, because MM accounts are not subject to market risk.

The risk didn't come from the debt - it came from the investment choices.



Sooooo getting back to the actual topic...

You can use CC's responsibly and not incur any additional risk.

[disneysteve]

Here's an example:

Say you had two responsible users,both married and have jobs where they make family combined incomes of 60k and both bought a $200,000 house

This has nothing to do with credit cards but I'd stop right there. A couple earning 60K shouldn't have spent 200K on a house. That was not a responsible purchase.

So no one in their entire life has ever made a mistake and forgotten to pay a bill or came up short that month?

Two very different issues there. Yes, I have accidentally missed a payment in the past, though I haven't done it for many years. I called and had the late fee waived without a problem. I'm not denying stuff can happen, so if that's what you are calling risk, I'll go along with that one.

As for coming up short, absolutely not. How can you possibly come up short if you are only using the credit card to make purchases for which you are already holding the cash to pay the bill? Yes, if you go insane and decide to spend the cash before the bill comes, that would be a problem. But we're talking about responsible people here. Responsible people don't do things like that.

If you paid for cash on something the deal is done and you move on, there are no interest rates, papers to sign, bills to pay, your done.

Despite that, millions of people pay millions of dollars every year in overdraft fees by spending more money than they have in their accounts and bouncing checks. Avoiding credit cards does not somehow make you more responsible with your money. If you are going to screw up, you are going to screw up. The credit card isn't the problem.