Some financial experts will tell you that using credit cards at all times is a bad idea. While this may apply in some situations, you may also find some credit card benefits that can help you improve your finances.
We're going to cover some of the benefits of using a credit card, as well as some things to look out for with credit cards.
Believe it or not, there are ways you can save big money with credit cards.
What are some credit card benefits?
Credit cards definitely have some drawbacks. However, there are some advantages to using credit cards as well.
Here are some ways credit cards can benefit you.
Credit card rewards
You can make serious money by taking advantage of credit card rewards. Depending on which credit card you use, you can earn reward points for:
- Free ride
- A new car purchase
- Points for credits for purchases on your card
- Rewards like free gift cards
And more. Using your cards for all of your normal, budgeted purchases can earn points that you can use to spend on things you would normally have to pay for.
Credit cards usually offer more fraud protection than debit cards. A couple of years ago someone made a two week purchase at a Caribbean resort with my credit card.
When I received my statement and saw the charges, I knew I hadn't been on a Caribbean vacation. It was mid-February and I live in the upper midwest.
Believe me when I say I would have been fully aware if I had enjoyed temperatures above 80 degrees. I didn't do it.
But getting the $ 1k + charge off my credit card was easy. I just called the customer service number on the back of the card, they took my information, and two weeks later I received a letter saying the charge had been reversed.
Debit cards have different fraud rules
However, debit cards have restrictions on the actions you can take if someone has used your card fraudulently.
Under the Electronic Fund Transfer Act (EFTA), in the event of debit card fraud, you have the following limited rights:
- Lost or stolen card reported prior to unauthorized transactions: $ 0 liability
- Stolen or lost card reported within two days of unauthorized transactions: maximum liability of $ 50
- Lost or stolen card reported within 60 days of unauthorized transactions: maximum liability of $ 500
- After 60 days: no protection
Conversely, unauthorized transactions with your credit card carry a maximum liability of US $ 50. However, many credit card companies have voluntarily reduced this liability to $ 0.
For this reason, it may be wiser to use a credit card to purchase than a debit card. This rule is especially true when you are shopping online.
Another benefit of using credit cards is that they are very convenient. You don't have to stop at an ATM to withdraw cash or add your debit purchase to your checkbook register to avoid an overdraft.
Instead, just make your purchase and worry about the details at the end of the month. This can be a tremendous time saver when running errands, shopping online, or just going about your busy life.
Some credit cards have expense-tracking features that allow you to categorize your purchases. This type of feature is great for budgeting and knowing where your money is going.
Build your credit history
Do you have a bad credit rating? Or do you have a bad credit rating that you want to overcome?
If so, using credit cards responsibly can help you build good credit, which can be helpful for everything from buying a home to looking for a job.
These are some of the main advantages of using credit cards. However, we can't talk about credit cards without talking about some of the potential downsides of using credit cards.
What are some disadvantages of credit cards?
Credit cards are not all rosy in terms of their benefits. This is the reason why some financial experts speak out against their use so strongly.
If you plan to use credit cards, here are some things to keep in mind.
If you use your credit card but don't pay the balance in full each month, you're paying interest to the company that owns your credit card.
To give you an idea of how much money you could be throwing out the window with credit card balances on you, here are some numbers:
- With a credit card balance of $ 10,000 at 18% interest, you'll be paying approximately $ 1,800 per year or $ 150 per month in interest
- With a credit card balance of $ 15,000 and an interest rate of 16%, you will pay approximately $ 2,400 per year ($ 200 per month) in interest
- With a credit card balance of $ 15,000 at 25% interest, you will pay approximately $ 3,750 per year ($ 312 per month) in interest
REMEMBER: The interest you pay on your credit card is not money that is used to repay your balance.
It's money that you just throw away every month – and money that the bank keeps as simple profit.
Are you really okay if you just hand over $ 200 to $ 300 a month or more to a credit card company for no reason?
To help you define your answer to this question more clearly, let's look at these Opportunity costs on this type of credit card debt. Opportunity cost is money that you could have had if, for example, you had earned compound interest on it instead of spending it.
If you invested the three dollar amounts in this hypothetical situation instead of throwing them away on credit card interest, how much money would you have?
After ten years of investment
- Invest $ 150 per month and earn 8% interest: $ 27,019
- $ 200 per month at 8% interest: $ 36,025
- $ 312 per month at 8% interest: $ 56,199
This money can be used to invest and increase your retirement savings, early retirement, or repay your mortgage.
Doesn't that sound better than tossing it to a bank for free?
Moral of the story: When you use credit cards for benefits, you are not negating these (and other) benefits by accumulating funds that you cannot withdraw every month.
A clear downside to using a credit card for everyday purchases is that it can be very easy to overpay. When you buy something with a credit card, it doesn't feel like real money.
You also have a good 30 days to withdraw the card. This makes it easy for you to forget about shopping and spend more than you planned on spending.
Simply put, buying things on credit is just too easy, and that makes spending more attractive – and too easy to spend.
Even if you do not accumulate funds that you cannot withdraw every month, you can still over-spend. And this money could well be used elsewhere.
Speaking of debt accumulation …….
Possible debt accumulation
A major and valid potential disadvantage of using credit cards is the potential for debt accumulation. It can be very easy to look at a $ 10,000 limit on available credit and think that I have to spend $ 10,000!
Unfortunately, spending money can go a lot faster than making money if spending is not kept in check. You see a new car in the car park. Or you can plan a vacation on a whim after a stressful week at work.
Then you have to make large monthly payments while reducing the credit card balance that has accumulated so quickly.
Which leads me to another thought, today's outlook on instant gratification makes it very easy to test the expense and see if you can afford the payment instead of assuming the debt.
You might think you can easily afford to pay for that new car or the big purchase you made with your credit card. The truth, however, is that the months are going to weigh on you with extra heavy payments, especially as you live from paycheck to paycheck.
Your goal should be to eliminate your debt, not to take it over again. Especially if you want to achieve financial independence.
You shouldn't use credit cards, though
If you are having trouble controlling your spending or if you are not fully aware of the dangers of credit card debt, avoid using credit cards.
No number of Reward Points is worth the risk of taking on thousands of debt if you are not in control of your spending.
If credit cards are a threat to your current financial condition, or if you have had issues with spending in the past, stick with using cash and debit cards.
Yes, it can be a little inconvenient. But not so inconvenient when faced with thousands of dollars in credit card debt.
You deserve healthy, happy finances. Get out of debt quickly and save towards all of your personal financial goals.
Financial independence, freedom from debt, passive income, world travel; Determine your financial goals, and then do what you need to do to achieve them.
You can do it!