Much to the dismay of some financial advisors, credit cards are a tool, and, if used responsibly, can bring some pretty substantial perks. It’s when self-control and head knowledge take a backseat to impulse buying that they quickly become a downward spiral, which could take years to dig yourself out of.
If your finances are in order, and you understand how debt works, credit cards provide some advantages that you won’t find with cash or a debit card.
Credit Card Benefits
This is the number one reason I use a credit card for each purchase.
When was the last time you heard about a data leak (ehem, Equifax anyone?), or someones card information getting stolen at the gas pump? If it hasn’t happened to you within the last 6 months, certainly it’s happened to someone you know.
While using a credit card doesn’t save you from having your information stolen or from fraudulent charges on your accounts, it does help against having your liquid cash reserves wiped out.
Should someone steal your debit card, they can easily empty your account. While most banks will work with you to get your funds sorted out, this process is lengthy; police reports have to be filed, an official investigation taken place, and then maybe you’ll get your money back. There’s no guarantee. With credit cards, you simply pay a $50 fee, and the card company will wipe out all charges not placed by you, and you’ll be back in business.
No bank holds
Whenever you travel, hotels, car rentals, and gas stations will often place a monetary “hold” on your account. This is a large sum of money that hits your card the second you swipe it, and is generally released 24 hours after you check out of the room, or return your car. Companies do this as a sort of “security deposit” to ensure that you have enough funds available on your card. It also protects them against larger purchases that may not have been initially anticipated, such as room service, or in case you trash the room.
While this money is returned promptly, it could put you in a bad situation if your checking account suddenly shows you have $500 less than you anticipated. Should you run into an emergency and were in need of cash fast, you could be put in a tight spot.
Credit cards are great for this sort of thing. Most of the time, your card takes 3-4 days for pending transactions to show on your statement anyway. You’ll hardly notice that these extra charges were placed there in the first place. This, for me, gives peace of mind, knowing that my hard earned cash is safe for my use, and not tied up in a temporary bank hold.
Making charges to a credit card, paying it off, and then leaving these accounts open for an extended period of time shows lenders that you’re responsible with your money. It also gives them a history to look through when you when it comes time to purchase a car or a home.
Having a credit card for a few years give these lenders an adequate amount of time to decide whether or not you’ll be responsible in paying your debts, and more importantly, paying them their precious interest.
Paying for everything with a debit card is great, as it means you have the cash on hand, and won’t risk going into debt. One thing you don’t have, however, is a credit score. While there are ways around this, it’s more of a hassle, and having a credit score in this day and age is just a way of life.
Here’s the big reason most people turn to credit cards: free rewards.
Last year, I signed up for a Chase Sapphire card. If I spent $4,000 within the first three months, I was gifted 50,000 “points”, which can be redeemed for cash, airline tickets, hotels, or all sorts of other goodies. As I easily spend $4,000 within a 3-month period of time, I signed up. I then took a trip to Mexico, cashing in my points.
I also gained 1 point per $1 spent, and 2 points per $1 spent on restaurants, and travel. Since I enjoy eating out, I figured this would be the card for me.
The downside to these reward cards is that they generally carry a steep interest rate, often 20% or more. If you’re thinking about using this card to transfer a balance, or aren’t willing to pay off the balance quickly, then these may not be for you. The rewards won’t outweigh the money you’ll be paying later in interest.
A couple warnings
While these cards contain benefits for most people, they’re not for everyone. Credit card companies aren’t stupid, and they have to make money somehow. For that reason alone, I mention a few warnings to keep in mind when using these cards.
The same Chase Sapphire card that I mentioned earlier, had a $0 annual fee for the first year, but a $95 fee the following year. That’s pretty steep, if you ask me. I used the card for the first year, cashed in on my rewards points, and then cancelled the card before the end of the first year.
While it’s only $100 per year, that’s $100 that you could’ve spent elsewhere. Or, even worse, that $100 balance sitting on your card can accrue interest quickly if left there long enough.
Never carry a balance
Interest rates to me have never been a concern, as I pay off my credit card balances each and every month. Never ever carry a balance, no matter what. Feel free to use a credit card, but if you carry a balance over from month to month, you are throwing money away which could be spent elsewhere.
Whether your card has a 10% interest rate, or a 2000% interest rate, it doesn’t matter if you pay the balance off in full as soon as you make purchases.
Credit cards won’t make you rich
Reward cards are great, but you’ll never hear words coming from Warren Buffet mentioning how he made a fortune off credit card rewards. Nobody has ever become rich via credit cards. The ultimate way is through investing, and smart spending habits.
The bottom line is this: Credit card rewards are great, if you can maintain the discipline. If you either don’t have the discipline, or don’t know if you have the discipline, you might be better off staying away just in case. In the end, it may only be a couple hundred dollars you’re missing out on, and making a few mistakes with a credit card can easily cost you much more than that in interest payments.
Do you use a reward card? Leave a comment below letting us know which you use, and how you’ve liked or haven’t liked it.