Credit Where Credit's Due

This morning, CNN Money posted an article regarding this year's most popular credit card.  For the past seven years, American Express earned that distinction, but now it has to share the honor with Discover (my family has been a loyal to Discover since its first national roll-out campaign in the mid-80s). Not surprisingly, the CNN trolls (the commenters with more opinions than knowledge) chimed in on the subject of credit cards, but they were immediately shut down at every post. Two trolls in particular stuck out. One compared credit cards to a layaway plan, insisting that people who can pay off their monthly amount were better off using cash, and the other said credit cards were the shovel you use to dig your own financial grave.

I will discuss the first commentary in a moment as it was more relevant, but the second comment stuck with me because it was the perfect test for a hypothesis I had a few weeks ago. Imagine how much more agreeable we would be if we used first person in place of second person in our comments. For example, if that CNN troll had instead stated “credit cards were the shove I used to dig my own financial grave,” it would inspire more empathy instead of the barrage of defensive outrage (though, for all I know, outraged replies may be the gold that trolls treasure in the first place).

A lot of media outrage has been generated over the years about credit cards. Some of it is warranted, especially the predatory methods some companies used targeting fresh-faced college students who were falsely assured all their efforts today would be rewarded later, so they decided to spend a blue streak today, driving themselves into those aforementioned financial graves later.  There was also a slew of good, old-fashioned stupidity involved in consumer credit abuse, as the first comment mentioned, such as using credit cards to buy things now to pay off slowly.  Aside from the extraordinary fees charged for that irresponsible behavior, I still believe the resulting sensation of depression it can cause is more costly.

Personally, I got my first credit card as soon as I moved out to Arizona. It was through MBNA, which was a highly rated credit company until it was bought out by a highly disparaged credit company several years later. My credit card limit started at $3,000, and within a few years, it became a platinum card with an exponentially higher limit (as you may expect, that change occurred with the change in companies). I was offended by the increase, fearing that I would be more of a target for credit fraud, so I stopped using the card. In reality, the more unused credit you have in your name, the better it is reflected in your credit score. Canceling the card was a mistake, which may adversely affect me in the future.

Regardless, I was excited to apply for a Discover card to replace my Platinum card. Truthfully, Discover popularized the rewards gimmick that is an unspoken obligatory offer in every credit card today. The CNN troll who incorrectly stated that credit cards are mostly used for layaway purchases further defended her point by saying that the consumer is charged for those rewards vis-a-vis the monthly interest rate (finance) charges. Once again, her information was warped by the media-hyped fear mongering, and clearly not by personal experience.

In keeping with my previously mentioned “first person” theory, by paying off my credit card balance each month, I am not assessed a finance charge. I will still benefit from all the rewards though (and the credit card company still comes out ahead in the game) because those rewards are generated by the fees that credit companies charge the merchants. Truthfully, we are a society so grounded in credit that it is difficult for small businesses to survive without accepting credit. There are a few restaurants that I do not frequent simply because they do not accept Discover (and a few others that I never visit because they do not accept any credit).

Credit has gotten a bad wrap (for some good reasons) over the past few years, but the simple truth is that there is a way to use credit cards properly and responsibly, and the totality of those benefits is better than strictly hailing to the King (BTW, “cash is king”).

The Full Motley -- 3Q, 2014

I had reallocated my assets on Monday as I do each quarter, moving only a small fraction of my account (two-thirds of 1%, to be exact), and then at lunch on Tuesday, I happened to hear a discussion on Money Radio 1510, discussing the allegedly over-inflated research in favor of reallocating periodically, specifically noting that re-allocating monthly or quarterly was pointless. While I support some of that argument more than my actions would suggest (I honestly do not believe moving 0.67% of an account is critically important for long-term financial success), there are a lot of additional benefits to reallocating that the hosts of this talk radio program grossly (or, conveniently) overlooked.

First, periodic re-balancing keeps you thinking. Specifically, thinking about your future and your investments. Two things that, while I may not have any problem finding time to do so in the middle of the day, many others fail to consider. Granted, to the point of the show's hosts, over-thinking is a common pitfall for novice (and even expert) investors, but, to my point, neglecting it is on the opposite end of the spectrum and more detrimental in the long run.

Secondly, contrary to that program's apparent belief, not every piece of financial advice should be made in order to maximize profits. There are many things that are recommended solely to reinforce good habits and establish discipline.  That discipline in particular will prevail with cooler heads whenever the markets get particularly emotional (e.g., market corrections).  Periodic re-allocations can be one of those habits.

Furthermore, the downside of their argument against reallocating was that the initial allocation is completely arbitrary.  The hosts are professionals in the industry, so maybe they have clients often come to them devoted to a strict allocation, only to learn later that this allocation was generated by a computer program or an even more impersonal method.  Regardless, dismissing re-allocations based on the validity of the target allocation is where I mostly took a defensive stand.

The largest purpose of reallocating small amounts, such as monthly or weekly or daily reallocating will do, is to achieve rule #1 in investing: buy low, sell high. Until your target allocation changes significantly, generally due to the natural process of aging, there is no better method to move money out of inflated assets or move money into deflated assets than reallocation.  Because the amounts being moved are small and because these re-allocations are predesignated periodically, there should be no decisions to second-guess or no bad news to cause an adverse reaction in a temporary panic.

Another good habit for long-term financial success is diversification.  This year, I started adopting many more markets and sectors in my Roth IRA, including the gold (metals) market, healthcare sector, and 3D technology sector. Diversification can get you far, but there is a limit to its fruitfulness. Most people know that there is such a thing as over-diversification, but few would say that issue negates the benefit of diversification altogether. Same goes for re-allocations. Dismissing either strictly for its limitations is throwing the baby out with the bath water.