I’m amazed by how much “misinformation” is out there when it comes to the subject of credit cards. Recently, someone online told me the financial collapse was caused by credit card lending — a stance that approximately no respected economists would agree with, yet this is a popular line among those who villainize plastic. If anything, a healthy amount of credit in a society promotes economic growth, consumer confidence, and spending.
Love using your debit card or wads of cash to pay for everything? Fine. Fantastic, actually. I’m not trying to convert you here. This is merely a reality check for people who would have you believe that credit cards offer no tangible benefits. (I’ve also listed the major drawbacks of credit cards, as I see them.)
Benefits of credit card use:
Build or re-build healthy credit — Responsible credit card usage is one of the major ways to boost your credit over time. This means paying your bills on time, and not maxing out all of your cards. Of course, there are other forms of credit such as auto loans that can strengthen a credit score as well. Good credit can save you literally tens of thousands of dollars over your lifetime; you’ll have access to cheaper credit and loans when you need it.
Cash-back or air miles — As long as you pay off your balance in full each month before interest accrues, there is really no downside to putting most of your spending on a solid cash-back rewards or airline miles credit card. In fact, most of the deals featured in Outlaw‘s card deals portal this month are airline cards, as I think they are one of the best ways to get something “more” out of your everyday spending. I typically net a couple hundred dollars in cash back each year, and a handful of free domestic flights as a result of my card use. You won’t get anything back when you spend using a debit card or cash.
Purchase protection — I like having a layer of insulation between my financial self and the merchants I buy from. For example, when you use a card at a gas station, many will place a $100 temporary hold on your account. If they did that to my debit card, I’d temporarily have $100 less in my checking account’s available balance. With a credit card, however, such holds are only temporary reductions in the credit line, which in my case is far larger than my checking account balance at any given time! These holds are getting more prevalent; many hotels and car rental companies will place a temporary authorization on your account as well. Additionally, if a merchant sells me something that isn’t what I wanted, I can dispute the charge with my card company — if I had given them cash, I’d have almost no chance of getting my money back.
Protection from income fluctuation & unforeseen circumstances — Everyone says that a credit card should not be your financial back-up plan, and this is true: a large emergency fund is a more prudent choice for those who can afford such luxuries. It’s nice to know you have access to a large credit line, though, even if you never need. When travelling abroad, for example, a credit card can get you out of a messy bind if your checking account is temporarily frozen due to suspected fraudulent activity (this happened to me once when I was in Portugal).
Also, after I left my full-time job as a writer in New York, I used cards to get by until the company I launched had sufficient income. There were certainly some lean days… A slice of pizza became dinner, and when I couldn’t even afford that a Snickers bar would suffice. My situation would have been even less comfortable without being able to tap my credit cards when necessary.
Drawbacks of credit card use:
You can spend more than you have — This is the big and obvious elephant in the room. If you have irresponsible spending in your past, or use shopping sprees as a way to lift your spirit (temporarily, of course), credit cards can be a danger. That massive credit line can lure you into feeling more wealthy than you actually are. If this describes you, avoid using credit cards, or use only one card and ask the bank to keep your credit line low so you can’t get yourself into too much trouble.
High-interest — This one sneaks up on you over time, not overnight. Still, if you are someone who usually pays only the minimum on your card balance each month, you could wind up paying thousands of dollars in unnecessary interest charges.
Spending for points — I think rewards credit cards are great if you’re making a purchase you’d make ANYWAY, such as your weekly groceries run, re-filling your car at the gas station, etc. But if you start doing things like buying more clothes than you need because you’re “only 500 points away” from a free flight or other reward, you’re losing out. Any financial benefit you derive from a free flight is probably outweighed by the hundreds of dollars in additional, unnecessary spending it took you to get there. For this reason, I normally ignore how many points or air miles I’ve accrued until the end of the month. My point balance is irrelevant. I buy what I need to buy, when I need to buy it, and that’s all.
— provided by Outlaw; see this week’s top deals in our card offers portal.
Disclosures: We’re a credit card offers site, so obviously we maintain financial relationships with numerous banks and financial institutions, including most major credit card issuers.
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