Credit Cards Grow As a Budgeting Tool

  Since she was an undergrad, Stanford University biochemistry lecturer Dafna Elrad, 34, has used a credit card as her primary budgeting tool. Choosing to carry just $20 or $40 in cash, she charges all purchases exceeding $5.
  Though debit cards often are viewed as superior to credit cards as budgeting tools because they require funds to be available before they can be spent, Elrad is among many consumers who prefer to use credit cards instead to monitor and control spending. Many also like to take advantage of the interest-free, 30-day loan they can get if they pay off their balances each month. Credit card rewards programs also tend to provide better payouts.
  "I use my credit card pretty much all the time," Elrad says, admitting, though, that "it takes discipline."
  A recent Jupiter Research study found that 14% of respondents said they use credit cards instead of debit cards for budgeting purposes. A separate survey by Dove Consulting found that 10% do.
  Card issuers are starting to recognize this relatively small, but growing, number of financially savvy consumers who prefer credit cards to control and monitor their spending, and issuers are providing support designed to fit their needs.
  Indeed, say JPMorgan Chase & Co. executives, a shift is occurring in the types of purchases consumers are opting to initiate with credit cards. "We see increasing use of credit cards for smaller purchases where people typically use cash. That's a lot of the spending people do, and they don't track it. It's very difficult for budgeting purposes to remember how you spent cash," says Tom O'Donnell, senior vice president with Chase Card Services.
  Each quarter, Chase, which is Elrad's card issuer, complements monthly statements with categorized summaries of the purchases she makes using on her United Mileage Plus Visa card. "I pay my bill in total every month, and I see how much I spend every month on a statement that's not confused with checks, cash withdrawals and deposits," she says.
  Besides giving quarterly summary statements, Chase helps these consumers in their pursuits of financial accountability by allowing them to download purchase details into financial planning tools such as Quicken software. "We see an ever-increasing number of people accessing credit card data in more ways than they ever have," O'Donnell says.
  Scott Strumello, associate at Auriemma Consulting in Westbury, N.Y., notes that many consumers, especially those who get paid on commission, tend to use credit cards as a budgeting tool. "They don't get a paycheck every two weeks, and credit fills a unique void," he says.
  But encouraging consumers in general to use credit cards as budgeting mechanisms can be a dicey proposition. Issuers welcome higher profits, but they do not want to risk higher chargeoffs, Strumello says.
  "Credit cards are lending products," he points out. "The borrowing element is where issuers make their money. As long as we're in the current environment, there's the opportunity to earn more on credit than debit." Banks receive higher interchange fees from merchants for credit card transactions than for debit card purchases.
  Some issuers are approaching consumers through financial education programs to position credit cards as relevant budgeting devices. Citibank's credit education initiative, Use Credit Wisely, offers free money-management information and financial tools online. The Use Credit Wisely Web site links to two standalone sites frequented by college students and Hispanic consumers.
  The Hispanic site is entirely in Spanish. CuidaTuCredito.com dispels common credit myths by explaining credit-related laws. It also outlines how to set a budget and stick to it. For those who get off track in responsible credit use, the site offers tips for regaining financial control of a card.
  The student site features interactive tools such as the "Budget Builder," which takes students on a step-by-step process to create a spending and savings plan. It also provides information on how credit can help individuals to manage their money. Student card statements feature credit-education messaging and periodic inserts about budgeting and money management.
  NOT FOR EVERYONE
  "Credit is a powerful tool, but it's also a big responsibility," says Samuel Wang, Citi vice president for public affairs. "Citi is dedicated to providing our customers with the information and tools they need to spend wisely and use credit to their advantage."
  From a business standpoint, it does not benefit Citi to have its customers get in over their heads financially, Wang adds. "Credit is only a good budgeting tool for those consumers who know how to use it wisely, such as staying within their credit limit, paying at least the minimum due each month and making payments on time every month," he says. "For those who have [a] spending and savings plan in place, credit can be a good budgeting tool because credit cards can help track monthly spending."
  Ed Bachelder, director of research for Boston-based Dove Consulting, agrees that credit cards have become a default budgeting tool for consumers who have aggregated their debt onto credit cards. "The number of bill payments people are reporting has dropped because they're aggregating their payments on cards," he says. "But positioning credit as a budgeting tool doesn't sound right to me."
  JeanAnne Fox of the Washington, D.C.-based Consumer Federation of America, agrees, saying it is like McDonald's positioning French fries as a nutritional supplement. She sneers especially at monoline issuer Capital One's recent association with Junior Achievement for financial education and budgeting tutorials that target "at-risk" middle school students.
  "It's one thing to point out information services to adults who are using your card, but generally there's a lot of concern about businesses' infiltration of the classroom," Fox says. "Promoting a risky payment mechanism to children who don't know how to handle it is harmful. Education has to disconnect planning and saving from spending."
  Capital One, a Visa and MasterCard issuer, declined comment for this story. But the issuer seems to be exercising rather robust foresight in bringing its brand to young individuals.
  Capital One, Visa USA says, is the most focused on education among the card association's members, especially given its Junior Achievement affiliation. "Financial literacy is a differentiator for member banks," says Jason Alderman, director of Visa's Practical Money Skills for Life program. Visa developed the initiative for high-school students, but it has been customized for elementary and middle schoolers as well as college students.
  ISSUERS AS TEACHERS
  Consumers who have been exposed to the programs show noticeable differences.
  A Visa/Wells Fargo program that launched in 2004 targeted college students with a curriculum built from Practical Money Skills for Life. The bank held a control group of cardholders at arm's length from the program while enticing others with five iTunes downloads for completing it. Those that went through the education program showed "much more responsible credit behavior, paid fewer late fees, and fewer of them revolved balances," Alderman says. "That's the kind of customer we want."
  Like Citi, Visa presents some material in Spanish and in English. Visa also hosts content in Chinese. "Those who don't speak English need help even more," says Alderman.
  Card issuers are recognizing that more consumers who are fiscally responsible see advantages in using credit cards as budgeting tools. Meeting their needs could help drive more transaction volume and card revenue.
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