Credit cards are good. Seriously. I think just about everyone should have at least one credit card to help build credit, use for emergencies, fraud protection, and a host of other benefits. But I know that not everyone agrees with me, and many people think that credit cards are bad.
A reader who has had past difficulties with credit card debt challenged me to stop using credit cards:
Ryan, I challenge you to go three months without using your credit cards! Put the $1000 emergency fund in place, freeze your credit cards (better yet cut them up!), and go the entire first quarter of the fiscal year without the plastic.
She believes credit cards are bad and that no one should use them. She has had problems with debt, so I understand where she is coming from. But even though she doesn’t love credit cards, I think her statement takes it just a little too far. Not everyone is in debt, and many people gain benefits from their credit cards.
10 Benefits of Using Credit Cards:
1. Build credit history: Charging small amounts and paying them off is a great way to establish credit history. Without credit history, it can be more difficult to get loans (including good loans such as student loans or a mortgage), secure insurance, or even land a job. If you are able to secure a loan without any credit history, your loan rate may be higher as a result.
2. Emergency source of funds: I mean for a real emergency. A real emergency fund is always best, but not everyone has $1000 cash to buy emergency airline tickets, make car repairs, deal with a natural disaster, etc. And in my opinion, paying 15% interest is much better than taking out a payday loan in an emergency. Some payday loans have interest rates near 1000% if left for an entire year.
3. Fraud / Theft Protection: If your card is lost or stolen, you are only responsible for the first $50 in unauthorized charges. Fraud protection for debit is similar, but only if you notify your financial institution within 2 days. If you wait longer than 2 days, you can be liable for up to $500 on your debit account. Fraud and theft protection is non-existent for cash.
4. Disputed charges: When you dispute a charge on your credit card, most credit card companies remove the charge until the dispute is resolved. With a debit card, the money will not be returned unless you can prove the dispute in your favor. With cash, the money is usually gone.
5. Rewards: Many credit cards offer rewards including cash back, airline miles, discounts, rebates, gift cards and many others. Most of these rewards are designed to get people hooked into using the cards or spending more than they would otherwise, but used properly, rewards points can earn you a lot of money. Some credit cards offer a sign up bonus of several hundred dollars – just for opening an account and meeting a minimum spending requirement.
6. Convenience: I don’t like to carry large amounts of cash with me. If you lose it, it’s gone. If it’s stolen, it’s gone. Credit cards are small, convenient, and carry better consumer protections. They are also convenient to use to buy things on-line, or to buy large dollar items. Another, convenience is travel. I will be going on a cruise next week and if I use my credit cards I won’t need to exchange as much currency. Some credit cards don’t even charge a foreign transaction fee.
7. Car rentals: Some car rental agencies will not allow you to rent a car if you do not have a credit card. Some may allow you to rent a car with a debit card, but may lock up a substantial amount of money in your account until you return the car. You won’t be able to use those funds during that time. Many credit cards also provide additional liability insurance when you rent a car. Debit cards? Not so much.
8. Extended warranties: Many credit card companies provide extended warranties on items you purchase with their card. In some cases, the manufacturer’s warranties are doubled. That’s not a bad feature!
9. Short term loan: Credit cards usually have a grace period, after which your payment is due. This can be several weeks, which allows you to earn interest on purchases you have already made. While this may not be a big deal for a hundred dollars, if you charge a thousand dollars every month and add it up over the course of a year, you can actually earn some decent money with this. With cash or debit cards, the money is immediately removed from your account and you do not earn any interest on it.
10. Budgeting tools: Most credit card companies provide detailed transaction logs which are easily downloaded into Quicken, Mint.com, or other free money management tools. This makes budgeting much easier to track and plan. Yes, it can be done with cash, but it is much more labor intensive. And time, as they say, is money.
Honorable Mention (NOT FOR EVERYONE!!!)
- Credit card arbitrage: (Note: this is only for experienced credit card users and not recommended unless you completely understand what you are doing, and are responsible enough to follow through with it). Credit card arbitrage entails taking a cash advance on an introductory 0% interest credit card offer, investing the money in a bank account to earn interest, and paying minimum payments until right before interest kicks in, then paying the card in full. Some people are able to do this to the point of having $100,000 in credit card debt, but the debt is actually cash which is earning them money in the bank. Use this calculator to determine how much you could earn from 0% balance transfers.
Credit cards should be paid in full each month
To get the most out of the benefits listed above, the credit card holder needs to pay the entire balance in full every month. When used properly, credit cards can be a very useful addition to someone’s life. When they are not used properly, credit cards can be BAD! In fact, I am an advocate of not using credit cards if that is not the best financial decision for your situation. Even though they do not have as many benefits as credit cards, I also think using debit cards can be a great way to make financial transactions. Always do your research, and please be financially responsible.
To finish off my public challenge:
The 10 reasons I listed above are benefits for me because I do not carry a credit card balance (I do not practice the “honorable mention” benefit, but it is worth noting). My wife and I have been blessed to have been able to put together a sufficient emergency fund, and we are able to use our credit cards for our purchases and pay them off in full every month. I won’t stop using my credit cards because for me, it is not a problem. In fact, doing so would cost me money.
In my opinion, everyone can benefit from having a credit card if they use it responsibly. The key here is responsible use. If you know you can’t handle it, or don’t think you can, then don’t do it.