Let's face it – credit cards get a bad rap, and with good reason. But with all the potential pitfalls of credit cards available to the modern consumer, the many benefits have been almost completely overlooked by the personal finance community.
"Credit cards are evil," the mantra sounds.
While the discussion continues to be one-sided, I'm convinced that you can make responsible use of credit and reap some well-deserved benefits, too.
This will be a two-part series on credit cards. Today I'll share some of the perks you'll get from using credit cards, and tomorrow I'll show you a foolproof way to never carry a credit card balance again.
Have faith – you can do it!
While cash offers almost no protections in case of problems, debit cards are fairly good at shielding you from danger.
The problem is they are directly linked to your checking account and 'real money.' In case of a difficult resolution process, you may be without your money for a little while. A friend of mine recently went through this for about a week.
A credit card dispute is different. The money hasn't left your hands yet, and – in most cases – the card company will waive the charges until the dispute is resolved.
While more and more debit cards are turning to rewards, credit cards remain the primary method of getting these goodies.
To get points with a debit card, you even have to 'use it' like a credit card most of the time (sign a receipt), presumably because the company gets a bigger share of the transaction.
If you don't think these points add up to much, consider this – over the last 2 years, I've racked up close to $500 in cash rewards from my cards, and my primary spending is still on debit.
Some credit cards will offer extended warranties on products purchased with your card. Many will double manufacturer's warranties, while some will give you a fixed warranty period, like one year.
Many will also provide you with various types of insurance (life or cancellation insurance on travel, theft insurance on products, car rental insurance, etc.). Many car rental business and hotels will also require a credit card or give you a hassle.
It's easy to separate your credit cards (if you have several) for different uses – i.e. one for day-to-day spending like gas and groceries, one for big purchases, etc. That may help you in your personal accounting.
Your credit score will like you. Credit scores reflect the responsible use of a variety of forms of credit, one of which is revolving. While it's possible to have a great credit score without a single card, having one can certainly help.
Protection from billing errors. Mistakes can and do happen with automatic billing systems and even at the store checkout. Sometimes, it can be days or weeks before you realize what's happened. Your bank account can empty and get hit with overdraft fees. Other bills can bounce, causing a cascading effect. With these errors on credit, you can continue to pay your regular bills while resolving the problem.
Before I incite a comment riot about credit card use, I just wanted to let you know that I will be talking about how to use a credit card responsibly tomorrow. It is possible!
Meanwhile, has your credit card provided you with other benefits? Share with us!
Agreed. The knee-jerk reaction people have to the credit card industry is that it is all evil. (And yet the majority of people carry them.) If there were no advantages to cards, the industry would never have become such a big part of our lives. These are some good examples of the good things that cards can offer.
I haven't paid a dime in interest in two decades.
But I have gotten free airline tickets, an Apple Computer, Bose Wave Radio, 20 in TV, and since moving to a MBNA Fidelity card, $8000 in my daughter's college account.
Now, since Dave has a billion fans and is divinely inspired, I am irresponsible. Despite the rewards I've gotten and the benefits that you listed, well, Dave says these things don't matter.
LOL Way to go, Joe.
I think nowadays it's almost becoming compulsory to have a credit card. Credit cards are a great form of identity verification, and they are also often used as "security" on a purchase – eg: a bond when you hire a car.
Great post – look forward to seeing your next post on using credit cards responsibly!
Jeremy – you raise a good point – can you even rent a car with no CC? How about a hotel room? Last, how much tougher is it to get a mortgage if you have no credit rating at all, lived your whole life on a cash basis?
My family puts *all* discretionary expenses and several fixed expenses on a credit card each month. Not only does this result in consumer protection on every purchase and a lot of rewards, but it also simplifies our cash flow forecast by collating all of these charges onto a single monthly payoff date. Budget categories still have to be carefully tracked so that the spending matches what we can afford, but the big gain is that our checking account has only about 12 transactions per month: the credit card payment, and the few other payments that we can't put on the credit card for some reason. This makes our cash flow situation very easy to stay on top of and predict.
It definitely makes your bank statements easier to review! This is similar to what we currently do.