Let’s start out with this, credit cards are not evil! In fact, debt as a financial instrument is not evil. It has many useful and reasonable purposes. To turn a phrase: debts don’t kill your finances; you kill your finances (by making bad choices).
Much to their detriment, I’ve found that a surprising amount of my generational peers are wary of debt to the point of even avoiding credit cards. I break down the benefits they’re missing out on into two general categories:
· Obvious benefits (i.e. cash back)
· Not so obvious benefits (i.e. fraud protection)
But first, this is important.
The caveat: This matters more than anything I just wrote or am about to write. No credit card benefit, no matter how great, is worth having an ongoing credit card balance. Do not spend money you don’t have! The responsible way to use credit cards is to pay off your statement balance, in full, monthly. If you can’t manage that then you have permission to avoid credit cards entirely, but, really, you should get help modifying your behavior and approach to money.
Ok, moving on…
Obvious Benefits of Credit Card Use
Cash back, points, airline miles… these are the major rewards that everybody associates with credit cards. And they should be! They can actually result in significant value. Each credit card company doles them out in a unique way hoping they can stand out from the rest. Some offer points intended to be redeemed specifically for travel, or for a specific airline. Others provide a cash back percentage on every purchase you make with bonus percentage for specific categories, such as groceries.
With the right combination of 2 to 3 cards, you should never receive less than 1.5% in value back on any purchase! In fact, it’s not very hard to average between 2% and 3% back on your total spending. If you spent $30,000 over the course of a typical year and averaged 2.5%, you’d end up with an extra $750 in spendable rewards!
You can do a lot with that. Working with young professionals, many of whom like to travel, I often encourage them to view this as part of their travel fund savings. This is easy and takes little to no work. It is not like you’re spending hours travel hacking.
Non-Obvious Benefits of Credit Card Use
Besides the “main” rewards feature that comes with credit card use, most companies these days throw in a bunch of other less heralded perks for being a customer. Here’s a quick list of them that is almost definitely not exhaustive:
· Return & Purchase protection
· Extended warranties
· Concierge and special event access
· Free credit score
· Car rental insurance
· Roadside assistance
· Global travel assistance
· Travel accident insurance
· Lost luggage reimbursement
· No foreign transaction fees
· Hotel & Travel upgrades
You may be thinking, “Cool, but how often would I really use those?” Well, not super often. But, the few times when you do need one of those perks it can be very valuable. Story time:
Earlier this summer I had the pleasure of traveling through Europe with my girlfriend. We were going through Germany on a train to our next town. Everything was going smoothly ,but then we went to get off at our connecting station and came to find out some tool bag had taken her bag… not a pleasant turn of events. Luckily, we only had 3 days left so we were able to manage. Why does this matter? We get back to the US, called the credit card company she bought the train tickets through, gave them info and filled out a few claims forms. She gets a couple hundred dollars sent to her to replace what she lost. That’s turning a frown upside down!
I compare credit vs. debit in more detail in “The Quick Guide to Protecting Your Financial Info”, but to sum up, you have much more protection against fraudulent charges on a credit card than you do a debit card. Generally, the maximum amount you can be held liable for is $50, you have a full 90 days to report the fraud, and the money is usually credited back to your account almost instantly. All of these are much more generous than the stipulations banks provide on debit cards.
Also, don’t forget this: when debit card fraud occurs, money is being drafted directly from your bank account! The bank will certainly replace the funds eventually, but what if your student loan payment is due and your money isn’t back yet? Yeah, not great.
Emergency Purchasing Power
Let’s take a similar scenario as above. Your bank accounts were compromised and the fraudster withdrew all your cash. The bank is going to cover any charges and replace the money back into your account but it could take 48 hours+ while they investigate. Yikes! You’re out of groceries, need gas to make it to work tomorrow, and have a dinner date that evening. Whatever will you do! Credit cards, man.
When you have an emergency where you don’t have the cash to pay for something, you can still use your credit cards.
Ok, that’s it - that’s the rundown. When you responsibly use credit cards to their full potential they can be very beneficial to your day-to-day financial life. Don’t be leery, as with much of personal finance, the only risk is in your behavior.