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.
When you’re dealing with credit cards, there are several different things that you should know. It’s important that you understand all of the advantages and disadvantages that you should be aware of when you’re handling your finances. Your finances are one of the most important areas of your life, and it’s important that you’re getting the most out of it.
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 $1,000 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.
This article is going to explore the different advantages of credit cards and some of the different ways that you can use them. Hopefully, this post will answer any questions that you have and give you some insight into the world of credit cards. I know that everybody is different, which means that not everyone is going to need a credit card, but I’m speaking for the majority of people.
Are Credit Cards Good or Bad?
If you read the first sentence in this post, you know my answer to that question.
Credit cards can be a great asset whether you’re bulking up your savings, building credit, or looking to score rewards.
But, there are times when credit cards can be detrimental to your finances.
Read on to see the good, the bad, and the ugly side of credit cards.
Good
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.
Having a good credit history can help save you thousands of dollars on all of the major loans in your life. For example, when you apply for a mortgage loan, the difference in an applicant with a good credit history versus a bad history could be thousands of dollars. Holding a credit card and making timely payments is one of the easiest ways that you can build your credit history.
Can you build credit history without using credit cards? Yes, you can. You can do so through certain other loans, including student loans, a mortgage, auto loan, and other loans. You may even be able to establish a credit score without any loans if you use a service such as Experian Boost, which tracks regular payments to utility companies, rent, and other providers that show you can make regular payments on time.
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.
As we mentioned, having your emergency fund in cash in a savings account is a much better idea, but if you don’t have that available, a credit card can be one of the best ways that you can pay for the bills that pop up. If something were to break or some emergency pop up, it can be difficult to pay for those bills, but that’s where your credit card will come in. It will give you and your family the money that they need.
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 online 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.
Bad
1. Temptation to spend: With a credit card, it’s easy to fall into the trap of spending more than you have. No matter what’s in the bank, one swipe will get you whatever you want. But those purchases have to be repaid with interest. Credit cards, like all of your finances, will either rise or fall based on how responsibly you manage your money. Budgeting and self-control are key to reaping the benefits of credit cards without the negative consequences.
2. Damage to credit: Along those lines, if you abuse your credit card, spend beyond your means, and fail to make payments on time, you’ll destroy your credit score. Likewise, if you close out old credit cards you could damage your score. Remember, that score is determined by your ability to responsibly make payments on a variety of credit lines over time. Every account you let slip is detrimental to your score. Spend wisely and use your card to boost your score!
3. Interest and fees: Once again, responsibility is essential. If you make late payments constantly or dig yourself into deep credit card debt, you’re going to amass even more debt with interest. You’ll also get slapped with late fees. Automating your payments and staying within your budget are excellent ways to ensure you pay the minimum. Research is also key. If you’re trying to transfer debt or pay off a major purchase, consider a card designed just for those purposes, with a long APR free period.
4. Fraud: Credit card fraud happens, and it could negatively impact your score. Clerical and reporting errors can also affect your score. In order to account for those issues, make sure to stay on top of your scores with a free credit report. You can then report anything that seems awry to get your report amended.
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.
If you have any more questions about credit cards or how you can use them, don’t hesitate to contact me today. I would be happy to answer those questions and ensure that you’re getting the most out of your finances. I know that navigating the financial waters isn’t easy, but that’s why I’m here to help. There are dozens and dozens of credit cards on the market, which means that there is one that will work well for you.
Ana says
Ryan, you’ve written a very long response here, so it may take me a few days to get to all your points LOL But first up, let me say: most of your “benefits” I also get on my debit card that has a Visa logo on it, and all the same protections. More to follow.
Pinyo says
As much as I love Ana because she is an M-Network member, I have to agree with you on this one Ryan. I love my credit cards (although I couldn’t name the 10 benefits until today).
Ryan says
Hi Pinyo,
I agree. I make money with my cards. But, I also understand Ana’s point of view, as well as anyone that has or has had trouble with credit cards. If they aren’t for you, then stay away! 🙂
marie says
Ryan has made some good points.
But one excellent reason for not using credit cards is that most credit card companies are out to get your money. I believe that credit card companies cost more for customers in the long run. I think that credit card companies are going to come up with more and more tricks to get money from their customers, whether those user are responsible or not. And most people do have credit card debt- it’s all too easy to get in to, and I think only the most fiscally vigilant customers manage to stay out of credit card debt. It’s not fair when people claim that those with credit card debt are not “responsible” with their credit cards – it only takes one emergency for the need to arise to whip out a credit card.
But I do agree with Ryan that sometimes it is a good idea to use credit cards – especially for larger purchases and emergencies. Good post!
Ryan says
Hi Marie,
You bring up some great points, and I tried hard not to imply that those with credit card debt are not “responsible people.” I know that is not always the case.
In my opinion, credit cards companies have one mission statement: Make money. And they do it effectively and in a variety of manners.
I wrote this article as a guest writer for the personal finance blog, Five Cent Nickel: 5 Worst Credit Card Practices You can also add to the list that credit card companies have started changing the due dates on their bills without advance notice. Anything to make a buck.
There is a fine line, and I don’t recommend using credit cards unless you are certain you can pay them off right away, or in the event of an emergency that is greater than your emergency fund can handle. In the case of emergencies, using a credit card is much better than taking out a payday loan!
Thanks for the great comment. 🙂
dong says
I too love my credit cards. They’ve been a great boon to me. I think whenever someone makes general all encompassing statement like “credit cards are bad for everyone” they are bound to be wrong. Everyone is a different situation.
While I agree that some credit card company policies are downright slimy, credit cards and credit card companies in themselves are not evil. Yes they are trying to make money, but so is the neighborhood laundry mat. There’s nothing wrong with that.
Ryan says
Good point, Dong. That’s why I stressed that everyone is in their own situation. It would be wrong for me to say “everyone should use credit cards.” That is definitely not the case!
Jason Dean says
The idea that no one should have credit cards is not only foolish, it is downright harmful — both to individuals and to society.
A credit card is a wonderful thing — if you can manage your money responsibly. If not, then YOU are the problem, not the tiny piece of plastic. Work on YOU. And when you’re ready, get a credit card and enjoy the benefits of a consumer-driven market economy.
I’m biting down on my tongue pretty hard as I write this post, because I actually find the idea that “no one should use credit cards” to be deeply offensive. Ryan pointed out numerous reasons why credit cards are good, all of which are sound, but what’s lost here is that credit fuels the global economy and has lifted hundreds of millions of people out of poverty. People would literally starve to death in the wake of cause-and-effect events, worldwide, that would be unleashed by the autocratic decree that “credit cards are henceforth banned,” or even if that poisionous thinking grew too widespread.
Thanks for setting the original poster straight, Ryan.
Ryan says
Jason, I agree that our world’s economy is based upon credit. That much is a fact.
But, using credit cards is a personal decision and one that shouldn’t be taken lightly. Ana’s blog, Debt-Free Revolution, is based upon her journey to get out of debt, and she writes primarily to an audience with similar priorities. For most people struggling to become debt free, using credit cards is probably not a good idea.
From her perspective, I understand where she is coming from. But, finances, like many other things are different for each individual and making a blanket statement doesn’t always work.
Kevin says
Couple of problems here:
3. Fraud on your cash. How would the fraudsters do that?
4. Once a dispute is brought to your bank’s attention, they usually will provisionally restore the disputed funds until the matter is resolved.
The rest I agree with, especially the honorable mention. Over the last year, I’ve made over $1,000 in interest with 0% loans off of my credit cards. It’s true, you really do need to know what you are doing, and watch things like a hawk.
JGP says
Hi Kevin..where are you investing the cash that it makes you more than the transfer fee?
Ryan says
Kevin,
#3. The original intent of this point was protection against theft and the fraud that can be made when your card or information is stolen. (I will edit the article to read fraud/theft protection). As for fraud I guess if you’re buying something out of the back of some guy’s truck and it turns out all you got was a box full of rocks, there would be no recourse. Of course, you shouldn’t be buying things from the back of someone’s truck anyway! 😉
#4. This depends completely on the bank. Many banks will do this, some may not. I would definitely check with your bank to determine their policy.
Thanks for the comment!
William Brooks says
This is a good post. Credit Cards are very powerful tools the problem is everybody can get one and they are so easy to abuse.
I personally have used credit cards for investments and I know people that have used credit cards to play with some interest rate arbitrage. These are advanced techniques, but pretty neat.
Credit Cards are currently saving my skin because I am receiving some nice 0% interest rates.
You really just need the strong education to learn to use them right.
Great Post!
Ryan says
William, the only investment I would do with a 0% balance transfer is a guaranteed investment like a savings account. If you are doing anything not guaranteed, that could end badly.
But I’m glad you liked the article. 🙂
kitty says
I actually find the idea that “no one should use credit cards” to be deeply offensive.
Me too. Especially because I am older and have used credit cards for over 20 years without ever carrying a balance. I do understand where Ana is coming from – some people may indeed be better off without credit cards at least until they learn to live within their means and get a very clear idea of what they can or cannot afford. Let’s not forget that more than third of credit card users pay their balances in full every month. This is a lot of people. Also statistics like “an average American is $X in debt” is misleading: one person with huge debt is enough to affect this statistics for a lot of people.
Kevin, in terms of fraud, while you may have no problems with cash, if you use a debit card and your number is stolen, the protection provided by credit cards is much stronger. Even when debit cards provide some protection, while your complaint is being investigated the money are taken from your account whereas with credit cards the disputed amount is in “limbo”. If someone uses your stolen debit card number and takes $1000 or more from your checking at around the time when your (automatic) mortgage payment is due, and you don’t notice the theft right away, you may have problems. With credit cards, the money are still in the bank.
Benefits of credit card says
I read all the 10 reasons and agree that credit card benefits in the times of emergencies. I met with many incidents where credit card benefited me lot.
David says
Some people will go as far to say they will only pay cash. But what if your money is earning 5% interest and you can finance at 2.5%? Lets use an example.
You have 100K earning 5% and want to buy a vehicle for 30K. Do you pull the 30K (which is earning 5% out and buy the car cash)
Why not leave the 30k earning 5% so you can finance 30K on the vehicle at 2.5% which nets you a positive 2.5% on that 30k until the vehicle is paid for.
JGP says
Hi David
You must share where you are earning 5%!
Ryan says
David, that is a great idea, and something a lot of people do on a regular basis. In fact, this is basically what people do with credit card arbitrage, and borrow money on an introductory 0% offer, then stick in an interest bearing account and slowly pay it back – the whole time earning interest!
deepali says
There is a different between “credit” and “credit cards”. Microcredit, for example, is a useful tool in the third world, particularly in the hands of a benevolent lender. That is one reason why I like Prosper and Kiva.
But one major reason why credit cards are bad – using your credit card perpetuates the cycle of injustice (even if you don’t experience any direct harm). For the same ethical reasons I don’t eat meat or shop at Wal-Mart, I don’t like to use my credit cards: I don’t want to buy into the system.
That being said, not all credit card companies are bad. I am really impressed with American Express, for example – they make a concerted effort to take care of their customers.
Ryan says
deepali,
I admire your views on the social implications of credit cards, and I think there will always be issues with credit cards, credit card companies, and just about every major corporation. I also think an entire book could be written on the subject! Those topics are very much out of the scope of this blog and my expertise! Thanks for the comment. 🙂
Dan says
Ryan, I agree wholeheartedly with your article above.
However, I’m wondering about one potential drawback to using credit cards that nobody has mentioned at this point: When a purchase is made with a credit card, the credit card company assesses a percentage fee to the merchant/service provider. Doesn’t this fee get transferred to the end consumer in the form of higher prices? So using a credit card contributes to inflation of goods and services.
That said, I still use my plastic for all the reasons mentioned in the article.
Ryan says
Dan, Yes, the fee does get passed to the customer. In fact, some stores refuse credit cards as a way to keep down costs, or they will offer a discount for people who pay cash. But, if you are one of those people who use cash back or other rewards cards, you now know where your reward is coming from. Transaction fees of 3% or the norm and cash back rewards of 1% are common. That still leaves a healthy cut for the credit card company.
Justin Long says
#2 IS A FLAW!!!!
I strongly recommend to take Dave Ramsey’s FULL class, The very first step he teaches is to save $1000 ASAP AND Save 3-6 months of savings (which means add up all your total bills; rent, utilities, phone, gas, food,ect; things you need to survive) out of your monthly income then put in a savings account for 6 months , just in case you lose your job, get hurt, get laid off…. you will have up to 6 months of living expenses saved up to use until you can get back on your feet.
On the other hand, if you have no emergency savings, and you lost your job…..what good will a credit card do you? Because if I’m correct, you have to pay off you credit card balance at the end of each month, regardless of any situation. And if you have no job for several months, how will you pay it off?
So in the long run, tell me what is better? Credit Card, or No Credit Card?
I can also DEBUNK the rest of your list if you want me to Ryan, just shoot me an email and I’ll give you the better half of the argument.
Ryan Guina says
Thanks for your comment, Justin. I have taken Dave Ramsey’s full class. I enjoyed it for the most part, but there were a few of his points I will agree to disagree with, including his staunch opposition to credit cards. Credit cards are a financial tool, and if used properly, they can offer excellent benefits to the user. If used improperly, they can cause major financial issues. A similar argument can be made about guns, and I compare the two here: Credit Cards and Guns. I don’t own any guns and have no desire to own any guns. But guns in and of themselves are not evil or bad. They are simply tools. When used properly, they can do good things. When used improperly very bad things can happen.
To your points: I strongly agree with saving an emergency fund of $1,000, then 3-6 months of savings. But not everyone is there yet. $1,000 will cover many, but not all emergencies. If you don’t have the money, you need to get it somewhere. A credit card is a better solution than taking out a payday loan or other short term loan with extremely high interest rates. I do not encourage using a credit card instead of using an emergency fund. But it is a good supplement to not having enough money in your emergency fund, when considering the alternatives.
Regarding paying off credit cards, no your statement was not correct. You do not need to pay the balance of a credit card in full each month, although that is the preference to avoid finance charges. Credit cards allow you to make payments on purchases so you can stretch out a purchase over time. As long as you continue to make the minimum payments and don’t exceed your credit limit, you can continue to use the credit card. In an emergency this can help people make it through hard times – again, when used wisely. (Note: You may have been thinking of a charge card, which requires the cardholder to pay off the balance in full each month. Charge cards and credit cards are different.)
In the long run, what is better, credit card or no credit card? For me personally, and for many people I know, using credit cards responsibly is a much better option. I earned over $1,000 cash back last year on purchases I made with my credit cards. I have my credit cards on automatic payment and the funds are automatically withdrawn from my checking account each month. I don’t worry about my credit card number being stolen (I have it happen twice due to data breaches and through no fault of my own), because I am not liable for any of the stolen funds. If that happened to my debit card I would have immediately lost access to all of the stolen funds for as long as it took to finish the investigation – potentially causing serious financial issues.
On the flip side, I know many people who shouldn’t use a credit card for everyday purchases. I would recommend they keep one for emergencies, since it wouldn’t be tied directly to their bank account. But I would only make that recommendation if they would limit the use to emergencies.
At the end of the day, it comes down to personal preference and responsibility. I prefer to use a credit card and receive the rewards points and bonuses, and I am responsible enough to do so without changing my spending habits or make late payments (in fact, I engineered it so I can’t make late payments as I automatically deduct my charges from my bank account each month – and yes, I review my statement each month too). If you are against credit cards, I’ll be happy to agree to disagree.
Justin Long says
Man, their marketing has gotten stuck in your head. Maybe you don’t fully understand the emergency fund, if you do ill go over it anyway.
Say your monthly income is $3200
Your Emergency Fund Should Consist of the Following:
Transportation
Food
Shelter
Clothing
Here are your costs for that for the month:
Phone $50
Water $100
Electricity $115
Rent $550
Gas $250
Food $265
Hygienic Items $30
Total: $1360
Save the above total for 6 months or less depending on what is best for you:
So $1360 subtracted from $3200 TWICE is $480 (remember only do this once for 6 months ONLY)
$1360 saved up for 6 months is $8160
Next add the first $1000 to that so now you have:
$9160 SAVED UP In my book that will just about cover any emergency just short of an organ replacement.
And you could live off that for 6 months…..
yes doing this process might mean for 6 months or however long it takes, to cut the cable, satellite radio, eating out, movies, but you still would have that extra $480 left for entertainment, or clothing purposes…. my theory is PAY YOURSELF not the CREDIT CARD COMPANY. If you think, i don’t want to even have to worry about any payment regardless the cost at the end of each month….. what if you did lose your job? and all you have is a card? It just puts you in a hole that takes some time to get out of…. and ill admit payday loans are stupid as all get out and i would never get one…. so CASH in the long run provides better insurance
Pauline says
@Justin Long Econimists all disagree, its a subjective field, but let me tell you something, unless you are making tons of money giving advice, you will need some form of credit, be it a mortgage, a car loan, or anything else. The average yearly wage for a single adult is 25,000 (average, so yes, more in Cali, less in Wyoming) if you want a 40,000 car without credit, you are saving for 2 years without any other expense.
Credit in necessary, also, getting a credit line without any yearly financial fees, then shredding the card is one of the best ways to boost your credit score.
Jen says
I haven’t seen credit card arbitrage mentioned on any blogs in years! When we did this 10+ years ago, people thought we were crazy. We had multiple checking accounts earning over 5% interest. We were floating well over 100k. We started the process to help us get out of debt. 2 years after we started, we were out of debt and we then continued to earn interest on borrowed money until the deals dried up.
It’s not for everyone! I loved the challenge. We still take advantage of offers when they come up but nothing like we did years ago when rates were higher.
Chris says
Good points, but disagree completely with #2. An emergency fund consisting of real cash is always preferable to using a credit card for emergencies. If you are paycheck to paycheck and don’t have $1,000 right now, fine … use your CC for a sudden expense. In all other cases, saving up 3-6 months expenses in a bank account as a safety buffer should be top priority. When you lean on a credit card for emergency cash, that’s how the banks nail you.