Ben and I were having dinner with one of our favorite couples this weekend, and as we were paying the bill the conversation turned to splitting finances.
As many of you know, when it comes to sharing finances, I’m a huge proponent of a mix of individual accounts and a joint account. Each person figures out his or her percentage of the household income (e.g., 60/40) and pays that same percentage of the joint bills. The rest of each person’s income can go to whatever he or she would like.
The more interesting part of the conversation came when we were talking about using a joint credit card and splitting that bill rather than using a checking account that already has cash in it. One of the guys runs his own small business, so he has a personal and a business credit card. It would be very easy for him to add a joint card.
I’ve actually been thinking about this issue a lot when I realized how much Ben and I miss out by not paying our joint expenses with a rewards credit card. Obviously, we couldn’t pay our mortgage on the card, but we could put the majority of our other expenses – food, entertainment, gas, etc. – on it. We would in turn earn thousands of dollars a year just by switching our mode of purchase.
The debate caused me to weigh the pros and cons of using a credit card. This is what I came up with:
- Rewards: One of the biggest advantages of using a credit card comes from the rewards. Even on the most simple 1% cash back card, if you spend $40,000 a year on joint expenses, you can earn $400 of cash. Depending on the card, the rewards could grow to 5 or 6 % of your purchases.
- Fraud Protection: With all of the recent security breaches at large merchants, fraud protection has become more relevant than ever. When it comes to credit cards, under federal law limits your liability for fraudulent purchases to $50. Whereas your liability can rise to $500 when using a debit card depending on how quickly you report the fraud.
- Easy Budgeting: A lot of credit cards now categorize your purchases for you. So if you are one of those people that doesn’t like to budget through excel or online software, this could be an easy way for you to get a sense of where you spend money as a couple.
- Spending Beyond Your Means: One of the most dangerous aspects of using credit cards is how it allows people to live beyond their means. You spend and spend, and if you come on a tight month, you just pay the minimum on your card. Before you know it, you’ve dug a $20,000 hole that you can’t escape.
- Credit Costs: In addition to digging a hole with your spending, the interest rates on credit cards can also get you in trouble. If you fall behind on your payments, your interest rate can go from that 7.99% teaser rate to 29.99%. On top of that, some cards carry an annual fee. Overall, your purchases become more expensive than you ever imagined.
- Joint and Several Liability: If you do decide to open a joint account, both parties become jointly and severally liable for the balance. That means the bank that issued the card could come after either or both of you to pay the balance. So even if one spouse runs up the credit line, the other spouse must pay the bill if they issuer decides to collect. This would becomes especially problematic when money problems lead to divorce.
The decision to use cash or credit depends on the people involved in the relationship. Take an honest inventory of the people handling the cards. The possible rewards points won’t outweigh the detriment of using credit cards inappropriately.
I don’t worry much about the cons in my and Ben ‘s situation. However Ben made a good point about the hassle of having to switch all of those accounts that we pay automatically to credit cards. To me, though, that couple of days of hassle, is worth the money we could save.