One reason why people use credit cards
By suspenseful
@suspenseful (40193)
Canada
March 11, 2008 10:34pm CST
We have just finished sending off our income tax, and I noticed that in my high interest savings account, there was a notice about the interest I made, and where I live, all interest is taxable even one cent. Now that got me thinking that perhaps the reason that people put things on credit cards is because they know if they save the money (unless under the mattress at which one does not get interest) in a savings account, especially if they are saving for a big item, by the time they have enough money, that interest will be taxable.
So even though it costs more to buy the item on credit cards, and even if you buy the item on the two or three year plan at which they will charge you a service fee of about $100 or so, people will not save for the item because they are afraid that part of what interest they make will be taxed.
So does anyone have any comment on this? I will still save for the item, because with deductions and charitable contributions I will still be ahead.
4 people like this
9 responses
@filmbuff (2909)
• United States
12 Mar 08
Logical as your reasoning is, I don't think that is the reason why people use credit cards. Here are some of the more common reasons:
1) Get item now, pay later.
2) Can't afford big item now, paid for all at once. See above.
3) Can't afford much of anything because of all there debt, so take on more debt and get item that they want.
4) Credit cards are convienent. Easier to pay with credit card and pay it off later, than to carry around cash, or write a check. I don't think hardly anyone under 30 writes check anymore. I write very few myself and opt for online payments of just about everything, or direct debit.
Now along your original train of thought, (mine is heading towards women's lingerie) I have relatives who will opt for 2nd checking account that does not pay interest at all. Simply because it makes keeping the account up to date more difficult.
With the interest rates as low as they are, a typical savings account doesn't earn much money at all. I think my savings account is earning about .85% interest. Weak, and kinda not worth it.
Regardless, the interest is free money. Even after it's taxed, you are still coming about ahead.
2 people like this
@suspenseful (40193)
• Canada
13 Mar 08
I have a high interest savings account, at 3.50 percent interest, so I am ahead, and a non interest checking account (you need about $1,000 or so for it to have interest on it.) and I do not like paying by check. I would rather use a credit card and pay it off at one time. Or I would use the debit card. My credit card gives points and some of the points can be converted to air miles, so I would use it when I have the money to pay it off in a month.
1 person likes this
@filmbuff (2909)
• United States
13 Mar 08
With credit cards having miles and cashback, if you keep them paid off they generally make you more money than the interest would on a savings account, especially with rates so low right now. 3.5% interesest is not that good. 15 or so years ago, you get 12% or higher.
1 person likes this
@suspenseful (40193)
• Canada
13 Mar 08
Here in Canada, we have to pay tax on interest, but the bank does not give out a tax receipt or T4 until you have so much in interest. I mean if you have $100 in interest, I can understand it, but $5, $10, or even $1? I cannot see it.
@sedel1027 (17846)
• Cupertino, California
12 Mar 08
You can save, but not put it in a savings account so that you won't be taxed. For example, up until very recently, I had a "savings" account which was a fictious account that was merely a check register that I placed money in and marked out of my checking account as savings.
2 people like this
@suspenseful (40193)
• Canada
13 Mar 08
The trouble is you do not get any interest. It must be a modern idea of putting the money in a mattress.
@sedel1027 (17846)
• Cupertino, California
13 Mar 08
Well, you don't get interest using a credit card either. It is cheaper - and more cost effective - to have a fake savings account rather than pile money into credit cards and be in debt forever.
1 person likes this
@GardenGerty (160677)
• United States
12 Mar 08
That is an interesting thought, and I believe I have heard that before. Long time ago, where I live, all credit card interest was deductible, and that was a reason that people charged things. Then it changed to only interest on your homes. That might help our economy, if we had more deductions to save us more taxes.
2 people like this
@suspenseful (40193)
• Canada
13 Mar 08
I do not know if that can happen in Canada. In the States, you have more things to deduct.
@djmarion (4898)
• Philippines
12 Mar 08
your idea looks logical however i think that's not the main reason why people use credit cards to pay for their purchases.
the main reason why most people use credit cards is because of tight budget, not everyone can afford to buy big items in one shopping without the aid of a credit card.
another reason is due to the increasing number of holdup and snatching incidents now where people are becoming victims of robbery. the tremor cause by these situations made cashless shopping very popular nowadays where shoppers just don't carry cash and instead use their cards for their purchases.
2 people like this
@suspenseful (40193)
• Canada
13 Mar 08
I do not like carrying cash around, that is why I use my credit card. I do have the money to pay for it. All I need is to transfer the money from my checking account to my credit account.
@Modestah (11179)
• United States
12 Mar 08
That thought had not occurred to me.
I use credit cards now because of online shopping, and certain incentives from the c.c. company... then just pay it off as I go along online banking makes it easy to pay that amount charged as you charge it - or a day or so after, whenever it makes it into their system.
2 people like this
@suspenseful (40193)
• Canada
13 Mar 08
I do not do much online shopping, but now that I am getting my Old Age Security, I will be doing more of it. I have the money in my checking account and just transfer it. It makes it easier for me and I have two credit csrds, one that gives dividends and one that gives points.
@charms88 (7538)
• Philippines
12 Mar 08
Hi suspense,
I am not knowledgeable about the credit card system in your Country. Based on what you mentioned, it seems you are paying more with credit card.
The credit card here are very flexible. We don't need to pay extra for any items we bought. The government had implemented a new law for all the establishments. They are not allowed to charge an extra fee for the credit card users. Whatever is the cost of an item, it should remain the same whether you pay in cash or card.
There's also a lot of on-going promo among credit card issuers. They are giving away 0% interest charge for any appliances you bought, no matter how many months or years you plan to pay for it. This also applies for those who wish to avail themselves of a big vacation to another Country. =)
2 people like this
@anniepa (27955)
• United States
15 Mar 08
It used to be even better here in the US when we were allowed to deduct the interest we paid on credit cards, auto and personal loans and even sales tax. That changed in the eighties though. You're right, since you have to claim any interest you earn as income you really are better off charging it and paying the credit card company.
Annie
1 person likes this
@ellie333 (21016)
•
13 Mar 08
Hi Suspenseful, I myself have never personally ever had a credit card, if I cannot afford to buy I will go without until I am able to afford. I have ordered from mail order and paid in instalments though and also have a mini ISA savings accounts which I beleive is a tax free savings on the first £3000 and as I never have that much it doesn't affect me directly, but you make some really interesting observations. Thank you for sharing with us. Ellie :D
1 person likes this
@suspenseful (40193)
• Canada
13 Mar 08
I guess that would be $6000 in our money, but here in Canada all interest is taxable. Mind you, as a 65 and over, we get more in deductions, but it is not that much.
