Back when he was in college, Zac Bissonnette wrote Debt-Free U, a witty, intelligent polemic which argues that student loans are like nuclear waste and explains how to fund a great college education without them.Now 23, Zac is back with How to Be Richer, Smarter, and Better-Looking Than Your Parents, an all-around personal finance book for young people. Yes, he wrote two books by age 23, and that is him on the cover, in the suit.
You have our permission to hate Zac Bissonnette just a little as long as you don’t ignore his advice, which is designed to keep you out of financial trouble when it seems like everyone (friends, retailers, banks) is scheming to get you in.
MintLife’s Matthew Amster-Burton spoke with Bissonnette about one popular flavour of trouble: credit cards.*
Do Recent College Grads Need to Build Credit?
MintLife: Say I’m just out of college, and I keep hearing from everybody that if I don’t already have a credit card, I need to get one—maybe a retail store card—and use it often in order to build my credit score and credit history. Do you agree?
Bissonnette: Just about the only good thing you can do with a good credit score is buy a house. It can help you get a rental property, but usually they’re not focused on the score; they’re focused on the report. And that’s really a huge distinction. The problems people run into with credit have to do with having bad credit: defaults, delinquencies, too much outstanding debt, repossessions, bankruptcies, liens, that kind of thing. The impact that having a limited credit history will have on your life is much more minimal.
Think about it. I saw someone on one of these morning shows the other day saying, “You won’t be able to rent an apartment if you don’t get a card and start to build your credit.” If that were true, you’d have this huge underclass of homeless people with lots of money but no credit. And that underclass doesn’t exist. If you have a limited credit history, there’s ways around it. You can get letters from a pastor or a rabbi or a teacher to make up for that.
And it’s not such a long process to get a good credit score. Especially, if you’re a first-time homebuyer, to get an FHA loan, which are often the best loans for first-time buyers, the credit score requirements are not as low as they once were, but they’re still pretty minimal.
The Odds Are Not in Your favour
MintLife: In the book, you say, “Conventional wisdom holds that credit cards are great as long as you pay your balance in full each month. It’s free money.” This is probably the most common argument in favour of not only carrying plastic, but using it every day. If you play by the rules, if you’re a responsible user of credit, it’s not going to cost you a dime, and you’re going to rack up rewards in the form of points, miles, cash back, and it’s silly to pass that up.
Bissonnette: I think you’ve used the line, “You are playing a game with people who know the odds better than you do.” And one of my concerns with credit card rewards is that I think it appeals to this kind of life-hacking testosterone-fuelled thing: beat the system, and be smart, and be clever. Absolutely, someone as smart and on top of it as Ramit Sethi can do well with credit card rewards.
As general personal finance advice, however, most people will spend more money when they use rewards cards, they’ll rack up more debt when they use rewards cards. There are different studies on this, and some of them, as you’ve noted, have methodological problems with them, but I think it would be really hard to look at the preponderance of evidence and say that the cost of using a rewards card doesn’t exceed the value of the reward.
Everyone thinks they’re the statistical anomaly. Everyone thinks that these studies don’t apply to them. That’s the nature of all this behavioural stuff. It seems stupid, these studies that showed that people spend more money when a menu has no dollar symbol. And everyone’s like, I would never do that!
I think most people would be better off trying to limit their interactions with the financial services industry rather than trying to make a game out of trying to beat them. If you’re a recent college grad and your credit card issuer is spending however many hundreds of billions of dollars a year trying to kick your arse, I don’t like your chances, personally.
Credit Cards Vs. Debit Cards
MintLife: So what about fraud? Isn’t a credit card safer than a debit card?
Bissonnette: If you go on Visa or Mastercard’s website, they all say that the protections are the same if you swipe the debit card for non-PIN transactions. I hate to say it, but I think people like to worry about identity theft because it’s something that isn’t your fault. It feels a lot better to be paranoid about identity theft instead of being paranoid about your own stupidity and inability to control yourself.
The bottom line is, identity theft is not all that common. It’s not as common as just screwing up.
MintLife: It’s a super-sexy sounding topic. There’s a cloak and dagger feel to it.
Bissonnette: That’s exactly right. That’s the problem.
Don’t Get Your Ego Check at the Checkout
MintLife: Say I’ve heard all of your advice and I’m not going to take it. I’m going to use my rewards card, but I want to do it responsibly and put myself at less risk of my own misbehavior. Any tips?
Bissonnette: If you want to use your credit card for things like your gym membership and putting gas in your car, expenses that are not going to vary tremendously, then it probably won’t matter. You’re probably not going to drive more if you pay for your gas with a credit card. On the other hand, pay with cash when you’re going to be likely to impulse-spend on stuff. Ramit said, and I don’t necessarily disagree with him, if you’re making a big electronics purchase, you should put it on a credit card because of the extended warranty.
On the other hand, you also need to keep in mind that when people talk about all these perks of having a credit card, the reason they give those to you is that they’re not worth very much. Not to be a jerk, but if those perks were worth a lot, you wouldn’t get them. They give them to you because they’re sexy and they don’t get used. Very few people have ever had the warranty on their credit card ever kick in on something.
The other thing is, secured cards can build your credit just as well as regular credit cards. So if you want to use a secured card, fine.
MintLife: But secured cards have the reputation of being only for losers.
Bissonnette: I hate the whole “letting your ego get wrapped up in what sort of card you have” thing. There are so many better things to be narcissistic about. Go to the gym.
*This interview has been condensed and edited for clarity.
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