10 Compelling Reasons Why You Need Credit Cards
A credit card is a free loan with lots of great benefits, as long as you pay it off each month. Learn how to take maximum advantage of your credit card.
We've all heard horror stories about credit card debt.
Americans are addicted to plastic, which comes at a staggering cost.
The average American has $4,028 in credit card debt, according to a Gallup analysis. At upwards of 14% interest, that could cost over $560 a year.
Since many of us are not paying our credit card balances off for decades, $560 each year, quickly adds up.
If you paid $560 to your issuer for 20 years in a row, which sadly is too common, you'd be out of pocket nearly $12,000.
Can you stomach giving close to $12,000 to credit card companies to pay for fees?
If you invested $560 each year in the US stock market for 20 years, you wouldn't just have $12,000 in your pocket, you'd likely have over $24,000 in your account.
That's the true opportunity cost of carrying balance on our cards.
We lose the chance to do something smarter with our money.
Even at age 70, 45 percent of credit card users have not paid off their monthly credit card bill.
These unpaid balances have major financial implications.
Instead of spending money on things like education, stress-busting vacations, emergency funds, or saving for retirement, we are giving too much of our hard-earned money to bankers.
So it's understandable that many consumers are spooked by credit cards.
Some of us have had had problems with cards in the past and cut them up.
Many people, especially millennials, now prefer debit cards, cash or checks and only use money in their checking account.
But guess what?
Their effort to avoid debt is admirable, but they are not seeing the problem correctly.
The truth: credit cards aren't dangerous, unpaid balances are.
It might seem smart to avoid credit cards altogether, but it's not that simple, writes Jamie Cattanach on The Penny Hoarder.
"Credit cards can actually be extremely useful — if you know how to use them right."
In other words, if you spend responsibly, you have nothing to lose—and a lot to gain—by regularly using a credit card.
Cattanach says that responsible use credit cards opens up a whole world of rewards, low-interest loans, perks, and other financial benefits.
Not only should you use credit cards, but you should be regularly looking to maximize all their benefits, which are plenty.
If you have cut up your old cards out of disgust, or you're just getting started, you should make sure you understand what not to miss when it comes to your credit card.
It's not the card that deserves the bad rap, it's the balance you leave on it each month.
From building credit to earning rewards like frequent-flyer miles, here are ten good reasons you should be using credit cards.
We take a detailed look at each one of these smart reasons to use a credit card.
Used responsibly, you'll find that your credit cards are useful tools to build up amazing financial benefits.
1. It allows you to borrow money for free
When you put a charge on a credit card, you essentially borrow money at no cost. Pay with cash or debit card and the money is gone from your checking account immediately.
Nick True, blogger at Mapped Out Money, explains that a credit card allows you to get a free short-term loan—as long as you pay your bill in full.
Like all loans, there is a certain amount of interest that you agree to pay the bank for the privilege of using their card.
However, the one unique thing about credit cards is that if used wisely they can be an interest-free loan.
Let's say I go out to eat and spend $17 on August 6th.
That $17 charge will be on my statement for August 5th – September 4th…that bill will be due on October 1st.
This means that I don't have to actually pay the credit card company for my $17 dinner until almost 2 months after I went out to eat."
So you can eat dinner in peace without worrying whether it will put you in the red. Plus, during that one or two month grace period, your money can earn interest in the bank.
Anything you can do to get your money earning interest should be your ultimate goal.
Even small money, like $17, matters.
$17 each month saved in a typical savings account earning 1% interest over 20 years nets you $398.81.
$17 each month invested in diversified investment portfolio earning an average of 7% interest over 20 years nets you $811.49 (nearly 2x what a savings account offers).
Free cash, whenever you want it, as long as you pay off the balance is an amazing offer from credit card companies. Take advantage of it!
2. You can earn valuable rewards like cash back or frequent flier miles
The right credit cards will give you amazing perks: a free flight to Europe, hotel stay or train tickets.
Cash back cards literally hand out money just for using them.
Sometimes the sign-up bonus alone scores you enough miles to fly to Aruba.
An entire industry of combing credit card offers for the best rewards has sprung up.
Brian Kelly created the blog, The Points Guy, and made a great name for himself for sharing tips on how credit card users could fly, stay, rent, eat, buy or free using points accumulated on their credit card.
Before you jump up and apply, there are so many deals out there—and companies competing for your business—that it's worth running the numbers before you apply for a card, says Philip Taylor, a writer at PT Finance.
"It's a smart move to think about what type of spender you are, before you run out and get the first cash back rewards card offered to you.
- Do you travel a lot for work or leisure?
- Do you spend a lot of money on hotels and flights?
- What about fuel?
You get the concept here.
Determine what type of spending you do and pick the cards that make the most sense for someone like you.
If you take the bus to work each day, then a card that rewards you for fuel expenses isn't going to work for you."
Given the free vacations and other incredible perks i.e. cash back in your pocket, it makes no economic sense to use a debit card when you could be earning tangible rewards on the same purchases with a credit card.
3. Using credit cards responsibly gives you a great credit rating
If you don't know your credit score number, find out.
The number is based on your credit report, which you can check—for free—through CreditLoan.
These three digits will affect whether you can get—and how much you'll pay for—a mortgage, buy a car, rent an apartment, or receive a business loan.
A bad credit score, below 640, makes it difficult to get a loan.
The higher the score, the easier getting an affordable loan will be.
In the middle range, you might get approved, but will pay higher interest rates.
Those towards the upper end of 850 will have access to money at good interest rates (many of these excellent credit score consumers will have incredible financing and reward offers thrown at them).
For instance, over 15 years, a $30,000 car loan will cost an extra $4,000 for someone with a low score compared to someone with a good score, according to myFICO:
How much you'll pay in interest for a $30,000 car loan based on your credit score:
If you pay off your balance each month, you won't pay a dime in interest.
Finance blogger Emma Drew explains that the best way to improve your score is to use a credit card and pay bills on time:
"Someone who hasn't had any line of credit may find it difficult to obtain important credit like a mortgage.
This is because the lenders have no way of judging how well you can manage credit given to you.
If you are looking to improve your credit rating then making regular purchases on a credit card and paying them back monthly.
This can be your fuel, groceries or anything.
Just remember to keep up with the payments so that you aren't charged interest."
Pay your bill on the due date to avoid paying any interest.
Want to pay ZERO credit card fees?
Use one card for certain type of regular expenses, and set a calendar reminder a few days before the balance due date to make sure you pay it off on time.
The only way to stay out of credit card debt is to avoid racking up those interest fees.
If you keep a balance, make sure the amount is what card companies consider "optimal."
Every credit card has a maximum borrowing limit. Credit card issuers look at the difference between how much you can spend and much you did spend (and not paid off).
If you have too much debt on your card i.e. a high balance, then it could negatively affect your credit score.
Credit agencies like to refer to a term called, "debt utilization ratio," which is a fancy way of saying that consumers should only have a balance of about 35% of the total card spending limit among ALL their cards.
Using a high percentage of your borrowing limit (having a high "debt utilization ratio") can hurt your credit score, while using a low percentage can help it, according to FICO.
4. In an emergency, you'll have access to quick funds
A credit card is an immediate source of funds in an emergency, provided you can reliably pay off the balance each month, especially if you are borrowing cash for an emergency.
Many credit card companies will charge an interest rate of over 20 percent on cash balances.
Most people only carry a little bit of cash at any time. It's usually just enough to cover daily purchases like a cup of coffee or bus ticket.
But sometimes you need more than that fifty bucks—right now. Maybe you have a sudden health problem or you need to book a hotel room when a flight is canceled.
Personal finance experts recommend that we all should have an emergency fund with about three to six months worth of our monthly spending inside.
But if you are a responsible credit card user and have a steady source of income, then instead of putting a large bulk of cash aside, you could use your credit card instead i.e. free money.
Jacob Lund Fisker, a blogger at Early Retirement Extreme, says that he doesn't have a disaster fund and uses credit cards for emergencies because it's more efficient than keeping money in a checking account.
"If I use a credit card, I will have a 20 day grace period during which I do not pay interest.
This gives me sufficient time to move money from my savings account or my broker account into the checking account from where I can pay off the credit card.
This way I am not losing money from money gathering dust in a checking account."
If you can pay off your balance, like Fisker, it's okay to accrue a little extra debt for a few weeks.
Invest the cash a credit card "gives" you
With a credit card, you can use the money you would have in your emergency fund to invest instead.
Responsible credit card users like Fisker know that $5,000, for example, in a savings account, which earns around 1% in interest each year, is nothing compared to the returns your money will get when invested.
For the last 90 years, the historical rate of return for the S&P 500, which broadly represents the United States stock market, is around 7%.
So that $5,000, if invested for five years, becomes $7,012.76 through the power of compounded interest.
That's $2,012.76 extra dollars in your account, simply because you had the security of a credit card backing you up as an emergency fund.
Left in a savings account earning 1% interest, that $5,000 would only make you $255.
Using a credit card for emergency funds—shifting what you would be saving over to an investment account tracking the S&P 500—would likely make you nearly $2,012.76 in 5 years!
5. There's no need to fear of loss or theft
If you misplace a wallet stuffed with cash, you're unlikely to see that money again.
If your credit card is lost or stolen, you're safe.
When you discover that a card is missing, you can report it to the credit card company to freeze your account or refund illegal purchases.
Your credit card issuer makes sure you don't pay for things you didn't buy.
Sometimes credit card companies are a step ahead of you, blocking suspicious transactions in advance.
When Ryan Guina, founder and editor of personal finance website Cash Money Life, had his credit card number stolen, criminals put $7,000 on his card in a single day.
He got that money back immediately when he alerted the card company, which is exactly why he uses credit cards rather than debit cards.
"In general, credit cards offer better protections than debit cards and won't put you in a financial bind if your number is stolen.
If a credit card thief maxes out your credit card, you can't make any charges, but you won't lose any money if you report it right away.
But if a thief your steals your debit card number he can drain your checking account in short order.
You will likely get the money back, but it could take days or even weeks while your bank investigates, leaving you in a bind until the situation is resolved."
Credit cards protect your money. The peace of mind is just as valuable, especially if you are traveling.
6. They are easy to use while traveling and give you good exchange rates
When abroad, credit cards are cheaper and safer to use than cash.
Credit cards save on foreign transaction fees
A credit card with no foreign transaction fees simplifies traveling. Check yours to make sure your card doesn't have any. If it does, consider changing to a new card that doesn't charge transaction fees or call your card issuer to see about an exemption.
Credit cards give you the current exchange rate without the surcharge applied at pricey airport currency exchanges.
For instance, at Travelex, a currency exchange company, 840 euros will cost around $1,000.
But if you used your credit card, and with $1 buying .92 euros as of May 2017, you'd only pay $915.
That $85 would be better spent at a Parisian brasserie.
Besides carefully making sure you pay off the entire credit balance for the billing period you traveled in, check the fine print on your credit card about cash advances. Credit card issuers often charge customers extra for cash advances.
Credit cards are also safer than carrying a wad of cash
Given the prevalence of pickpocketing in tourist centers, do you really want to walk around with $300 in your pocket? A stolen credit card can be canceled, but stolen cash is gone for good.
Be smart when using cards abroad
Before you leave home, be sure to alert your credit card company of where you'll be traveling, so it doesn't put a hold on your card when it's used in a new country.
On QuickandDirtyTips, guest writer Daniel Abrahams advises consumers to be prudent when traveling with credit cards.
"Only carry the cards that you will be using and leave the rest safely back at home.
Also, remove any cards that display your personal details such as your driver's license information, your Social Security details, or your address."
When you return from the trip, he says, take a careful look at your statement to see if there are any items you don't recognize. If so, alert your bank immediately.
7. It helps you track spending and stick to a budget
Keeping a budget is key to financial health—such as paying off your credit card bill each month. Your monthly statement helps you do that.
It logs a record of all your purchases, a handy tool for anyone trying to track their spending.
Instead of keeping paper receipts, you can go on the card website to see an itemized list of expenditures.
Some card websites even break down purchases into categories, so you can see where the bulk of your charges are and what needs trimming.
Sam Dogen, aka the Financial Samurai, says that "tracking credit card expenses is one way to battle lifestyle inflation" by letting you examine the spending choices you make every day.
He says he used to only glance at the statement total.
Once he started to examine each line item, he got to know his spending habits.
He found a large charge that could be reimbursed and how taking the bus saved money on fuel.
Though a simple practice, it made him more conscious of everyday costs.
Knowing what you spend your money on (i.e. budgeting) is what separates people who can save and who can not.
If you want to save, you have to budget. Credit cards are great budgeting aids.
8. You can automate all recurring bills onto one credit card
Many people have countless recurring charges every month, like utility and cell phone bills.
They have a lot of due dates to remember.
When charges are connected to a credit card, you just have to remember the credit card due date.
It's one less thing in our busy lives to worry about.
Plus, if you have a rewards card, then you'll be accumulating points and other benefits just by paying your bills.
The convenience also has an environmental effect, since it reduces paper bills and checks.
That said, consumers can lose track of bills when they're paid automatically.
It's important that you regularly check your credit card bill to make sure you're not paying for services you long ago stopped using.
Stopping a recurring payment can be tricky, however. Here's how you can do it.
First, the charge might still appear on your credit card bill even after you've told the vendor to stop.
Considering this problem in the New York Times, reporter Tara Siegel Bernard writes that the government provides consumer protections for just such scenarios.
"You have 60 days from the time you received the bill with the erroneous charge to notify your credit card company, in writing, of the problem.
The card issuer then has 30 days to acknowledge that it received your note, and must try to remedy the situation with the biller within two billing cycles of receiving the note (but no longer than 90 days), according to [government] regulations.
Always remember to keep a paper trail once you start the process, and get the names of all customer service representatives you spoke with, and keep records of the date and time you spoke with them."
9. Credit cards help protect your purchases
Many credit cards come with yet another built-in perk: free insurance.
If you buy something and it's lost, damaged or stolen within a set period of time, you get the money back.
Some cards even include car rental and travel insurance or extended warranties.
In a guest post on Modest Money, financial writer Harry Campbell breaks down the many types of consumer protections that credit cards offer, from roadside assistance to event ticket insurance.
He had never taken advantage of them until he cracked the screen on a brand-new iPhone.
"I was going to have to buy a new one or pay Apple a ridiculous $200 replacement fee. As I was contemplating my options, I remembered about my credit card protection plan.
At the time, my card was an American Express (AMEX) Gold that I was trying out. It turns out they had an awesome retail protection plan that goes way beyond lost or stolen items.
This was the first time I was aware of any type of protection plan for my purchases. In order for AMEX to cover the replacement cost of my phone, I had to write a letter saying I had no other form of insurance, get it notarized and have it sent in.
I took my old phone to the Apple store, paid for a new one and AMEX credited me the $200.
It was a pretty simple process and it turns out that almost all credit card companies offer some type of protection against these types of events."
Like Campbell, many credit-card holders are unaware they have this safety net.
Learning what benefits your card already offers can save you serious money. Benefits include:
Consumer protection for accidental damage
Return protection if you change your mind about a purchase
Price protection to cover a discount that occurs after you buy something
Reimbursement for tickets you can't use
Lost luggage reimbursement
Travel accident insurance
Car rental insurance
No foreign transaction fees
These extra value-added services—besides the ability to borrow money for free—make credit cards even more worthwhile.
10. Smart credit card use helps students build good financial habits
The perks of credit cards are dependent on paying the bill on time.
Those who do so not only build good credit but they learn important personal finance habits.
This can be especially helpful for college students.
While parents debate whether it is wise to give their older children a credit card, those who do have a chance to teach them how to use it responsibly. After graduation, parents lose influence over decisions.
It's important to teach children these lessons early on, writes credit card expert Beverly Harzog in the Wall Street Journal.
During college, it's usually cheaper to recover from credit mistakes than after graduation, when they may also face student debt.
In summary, Herzog argues that students should get credit cards because:
- It's important they learn about compound interest and how to control spending.
- Students will start building a good credit score early on.
- They will learn that smart spending habits lead to a good credit score.
- Good credit will ease the transition to adulthood, leading to lower deposits for apartments and lower premiums for car insurance.
- It helps graduates get a job since employers increasingly look at credit history.
In order for credit cards to be a teaching tool, though, parents need to be involved.
- Have open and frank conversations about money and the cost of items in your life
- Make sure to explain how much you have to work in order to afford various expenses
- Explain what is your credit score and how you earned it
Taking a hands-on approach at first will show kids to be responsible and financially independent later.
Credit cards are great tools to have
Even if you have been burned in the past with credit cards, it's important that you note all the powerful benefits responsible use of a credit card offer.
Remember, it's not the card that's often the problem, it's when the balance exceeds what you can reliably pay off each month.
Once you know how much you earn and how much you spend, which a simple budget can tell you, then you can start to safely put most of your expenses on your card.
By paying it off each month you can rack up sizable bonuses and offers - not to mention a stellar credit score.
Where do you stand on credit cards?
Do you think they're a helpful tool or dangerous threat?
Let us know in the comments below.