Some financial experts will tell you that using credit cards at any time is a bad idea. While this can be true in some situations, you might also find some credit card benefits that might help you improve your finances.
We’re going to share some of the benefits of using a credit card, and also some of the things you might want to watch out for where credit cards are concerned.
Believe it or not, there are ways to save a lot of money by using credit cards.
What Are Some Credit Card Benefits?
Credit cards definitely have some downsides. But there are some benefits of using credit cards as well.
Here are some ways in which credit cards might be beneficial to you.
Credit Card Rewards
You can earn some serious cash by taking advantage of credit card rewards. Depending on which credit card you use, you can earn rewards points toward:
- Free travel
- A new car purchase
- Points toward credits for purchases on your card
- rewards such as free gift cards
And more. If you use your cards for all of your normal, budgeted purchases, you can earn points to use for spending on things you normally would have to pay for.
Credit cards typically offer more protection in the way of fraud than debit cards do. A couple of years ago, someone used my credit card to purchase two weeks at a Caribbean resort.
When I got my statement and saw the charge, I was well aware of the fact that I hadn’t been on a Caribbean vacation. It was the middle of February, and I live in the Upper Midwest.
Believe me when I say I’d have been fully aware if I had been enjoying 80+ degree temps. I hadn’t.
But getting the $1k+ charge off my credit card was easy. I simply called the customer service number on the back of the card, they took my information, and two weeks later I got a letter saying the charge had been reversed.
Debit Cards Have Different Fraud Rules
Debit cards, however, have limits on the actions you can take if someone has fraudulently used your card.
According to the Electronic Fund Transfer Act (EFTA), you have the following limited rights in the event of a debit card fraud situation:
- Lost or stolen card reported before unauthorized transactions: $0 liability
- Stolen or lost card reported within two days of unauthorized transactions: $50 maximum liability
- Lost or stolen card reported within 60 days of unauthorized transactions: $500 maximum liability
- After 60 days: no protection
Conversely, unauthorized transactions on your credit card carry a maximum liability of $50. However, many credit card companies have voluntarily reduced that liability to $0.
For that reason, it can be smarter to use a credit card when making purchases as opposed to a debit card. This rule especially applies if you’re making online purchases.
Another benefit of using credit cards is that they’re really convenient. You don’t have to stop at an ATM to take out cash or record your debit purchase in your checkbook register to avoid an overdraft.
Instead, you simply make your purchase and worry about the details at the end of the month. This can be a huge time saver when you’re running daily errands, shopping online or simply going about your busy life.
Some credit cards have spend tracking features that help you divide your purchases up into categories. This type of feature can be great for budgeting and just knowing where your money goes.
Building Your Credit History
Do you have a scarce credit history? Or do you have a bad credit history you’re trying to overcome?
If so, using credit cards responsibly can help you build a good credit rating, which can be helpful for everything from buying a house to getting a job.
Now, those are some of the main benefits of using credit cards. But we can’t talk about credit cards without talking about some of the potential disadvantages of credit card use.
What Are Some Disadvantages of Credit Cards?
Credit cards aren’t all rosy in terms of their benefits. This is why some financial experts speak so strongly against using them.
If you’re going to use credit cards, here are some things you need to be aware of.
If you use your credit card but don’t pay the balance in full every month, you’ll be paying interest to the company that owns your credit card.
Just to give you an idea of how much money you could be throwing out the window if you carry credit card balances, here are some numbers:
- On a $10,000 credit card balance with an 18% interest rate, you’ll pay roughly $1,800 per year or $150 a month in interest
- With a $15,000 credit card balance with a 16% interest rate, you’ll pay roughly $2,400 per year ($200 per month) in interest
- On a $15,000 credit card balance with a 25% interest rate, you’ll pay roughly $3,750 per year ($312 per month) in interest
REMEMBER: The interest you pay on your credit card isn’t money that goes toward paying down your balance.
It’s money you simply throw away every single month–and money the bank keeps as easy profit.
Are you really okay with simply handing over $200-$300 a month or more to a credit card company for no reason?
In order to help you define your answer to that question more clearly, let’s look at the opportunity cost on that kind of credit card debt. Opportunity cost is money you could have had if you, say, earned compounding interest on it instead of spending it.
If you invested the three dollar amounts in this hypothetical situation instead of throwing it away on credit card interest, how much money would you have?
After Investing for Ten Years
- Investing $150 a month and earning 8% interest: $27,019
- $200 per month at 8% interest: $36,025
- $312 per month at 8% interest: $56,199
This is money you could invest and use to boost your retirement savings, save toward retiring early, or pay off your mortgage.
Doesn’t that sound better than tossing it over to some bank for free?
Moral of the story: If you’re going to use credit cards for the benefits, don’t negate those benefits (and more) by accumulating balances you can’t pay off each month.
One definite downside to using a credit card for everyday purchases is that it can be really easy to overspend. When you purchase something on a credit card, it doesn’t “feel” like real money.
In addition, you’ve got a good 30 days to pay the card off. That can make it easy to forget about purchases and spend more than you’d planned on spending.
Put simply, buying stuff on credit is just too easy, and that makes spending more attractive–and overspending far too easy.
Even if you’re not accumulating balances you can’t pay off every month, you may still be overspending. And that money could be put to good use somewhere else.
Speaking of debt accumulations…….
Possible Debt Accumulation
One major and valid potential downfall of using credit cards is the potential for debt accumulation. It can be very easy to look at a $10,000 “available credit” limit and think “I’ve got $10,000 to spend!”
Unfortunately, spending money can go much faster than earning money if spending is not in check. You see a new car at the car lot. Or you schedule a vacation getaway on a whim after a stressful week at work.
Then you’re left with large monthly payments to deal with as you whittle down the credit card balance that accumulated so quickly.
Which leads me to another thought: Today’s instant gratification mindset makes it very easy to consider spending in terms of whether you can afford the payment instead of whether you should be taking on the debt.
You might think you can easily afford the payment for that new car or large purchase you made with your credit card. However, the truth is that the months of additional large payment will weigh on you, especially if you’re living paycheck-to-paycheck as it is.
Your goal should be to eliminate your debt, not take on more. Especially if you hope to reach financial independence.
You Shouldn’t Use Credit Cards IF
If you have trouble controlling your spending, or if you aren’t fully aware of the dangers of credit card debt, you may want to avoid using credit cards.
No amount of rewards points is worth the risk of taking on thousands in debt if you don’t have your spending under control.
If credit cards pose a threat to your current financial state, or if you’ve had problems with spending in the past, stick with cash and debit card usage.
Yes, it can be a little more inconvenient. But not as inconvenient of facing thousands of dollars of credit card debt.
You deserve healthy, happy finances. Get out of debt fast and start saving toward all of your personal financial goals.
Financial independence, debt freedom, passive income, world travel; determine your financial goals and then do what you need to do to achieve them.
You got this!