We help people eliminate debts like credit card balances and achieve financial freedom, so it’s often assumed that we are against credit card use. That’s not true; we know credit cards are a necessary part of your personal finances, and the truth is that there are some benefits that are impossible to ignore.
In fact, these days it’s practically essential to have a credit card. That’s why we offer our free Wise Use of Credit seminars and educational materials. There are good ways to take advantage of the benefits of credit cards, and we are committed to empowering our consumers with knowledge on how best to reap those benefits without falling prey to the dangers of credit card use.
Here are a few of the benefits of having credit cards:
1. Credit history
The primary way consumers establish and build a credit history these days is by getting a credit card. Once they’ve made a few on-time payments and that positive payment history is reported to the credit bureaus, the consumer will start to build a credit history and a good credit score.
In some cases, consumers might need to start with something like a secured credit card to get established, but then they can graduate to a full-fledged credit card after they’ve proven themselves capable.
After establishing good credit, they can then get bigger loans like auto loans and mortgages. And the better one’s score, the less interest rate there will be on these larger loans.
The ability to borrow money isn’t the only reason to establish good credit. Getting a rental lease, getting a job, graduate school admissions, getting insurance, and getting utility services are some of the many circumstances where one’s credit record is a factor in whether you’ll get a service and how much you’ll pay. Having established a good credit history with responsible credit card use affects many aspects of your financial life.
Using credit cards is safer than cash in several ways. For one thing, it’s safer to walk around carrying a card rather than cash. If you are robbed of your credit card, you can call the issuer and have the card canceled. And if the thief does use the card, you will not be liable for the fraudulent purchase. By law, you can sometimes be liable for the first $50 of a fraudulent transaction, but many cards offer zero-liability protection, and most will waive that first $50 when refunding the fraudulent charges.
With cash, anything stolen from you is simply gone for good.
Credit cards also make it safer to shop online, where using a debit card puts your actual bank account balance at risk. If you use credit, often times the purchase can usually be canceled and refunded without any financial loss to you.
These days, many credit cards come with fraud protection, where the creditor will alert you if a suspicious transaction goes through, or even decline a purchase on your behalf if it doesn’t look right. This can be a small hassle—sometimes you’ll have to call the credit card issuer to get a transaction authorized, but at least you know that a thief will have a hard time using your credit card fraudulently.
Credit cards are convenient to use—they’re accepted virtually everywhere, and they allow you instant access to your available credit.
This is something of a risk, and it’s why we’ve spent over 40 years coaching people to how use credit cards effectively and the importance of promptly repaying credit card debt. Having all of the credit available to you instantly usable can get you into excessive debt quickly—but it does make many financial situations much easier to navigate.
People overlook some of the common miracles of modern commerce—as economist Walter Williams points out, you don’t call your grocery store ahead of time to tell them when you’re going to be there, or what you are going to buy, but they’re always ready for you, and their shelves are stocked with the goods you need. And thanks to credit cards, you don’t even have to know how much cash to bring. You don’t have to stop at an ATM and get out extra money to cover the shopping trip; you just swipe your card and everything is covered.
Clearly, we want anyone who takes advantage of this convenience to pay off their credit card balances in full every month, but the benefit is undeniable.
Another convenient feature of credit card use is your transaction history. All you have to do is pull up your account on the credit card company’s website and you’ll see every purchase you’ve made, where you made it, and when. This is a huge help when budgeting, preparing tax returns, or any other time you might be organizing your finances. Tracking spending is the cornerstone of the budgeting education we provide, and credit cards make tracking much more convenient.
4. Free loans
As long as your credit card doesn’t carry an annual fee, you can use it to get a free short-term loan every time you use it. If you pay off the balance owed before the grace period expires, you don’t have to pay any interest at all.
This is quite remarkable, really. You can get all of the benefits of credit cards that we’re talking about, entirely for free. Not every credit card user maintains a perfect zero balance in this way, but it’s possible, and that makes credit cards a potentially free product.
These grace periods tend to be around 25 days, and if one is offered, it must be at least 21 days by law. They must also be consistent from month to month, so credit card companies can’t just change your grace period at will.
We urge everyone to create an emergency savings fund equal to 6 months’ income. This is a tough goal for many people, and the reality is sometimes emergencies come along before our emergency fund is established. In these situations, credit cards can be a lifesaver.
We’re talking about legitimate emergencies, and situations when you are unable to earn an income until the situation is resolved. So if your furnace stops working and you live in a cold environment, you need heat to survive. If you don’t have enough savings set aside to pay for necessary repairs, a credit card can get your heat working again sooner than if you had to accumulate the funds over time.
Another emergency might be a necessary car repair, where not having a car prevents you from earning a paycheck. Any situation where you can’t earn an income is an emergency worth tapping into your emergency fund. But if there is no emergency fund, a credit card can get you through the emergency.
Of course, this is a perilous bit of advice; we don’t want anyone to fall so deep into credit card debt that they’ll never get out. That’s why the first financial goal we tell people to set is to establish their emergency savings fund so they don’t need credit cards to get through such a situation.
The emergency fund is 6 months’ income, and there’s a reason that’s our suggestion. Depending on economic conditions and your line of work, according to the Bureau of Labor Statistics, that can be the average length of unemployment, so you need that much money on hand in case of unexpected job loss. The worst thing you can do if you lose your income is to rely on credit card debt to live. Never use credit as a substitute for income. A credit card can get you through a single emergency situation, but if you’re tempted to use credit cards for all of your living expenses during a period of unemployment, you must find another way. Cut up your credit cards and call us for financial coaching. (And check out our free “Surviving a Job Loss” seminar materials.)
Credit card companies offer many special perks and bonuses for their customers. These perks are usually not reason enough to go into credit card debt but combined with all of the other benefits of credit cards, you can gain some tangible rewards for your credit card use.
- Rewards – credit cards can offer cash back, reward points, or special discounts to particular retailers. All of this could mean extra money in your pocket, so you should definitely take advantage of any rewards programs you have access to.
- Price protection – your credit card company may protect you from an unexpected price change after you make a purchase. If you buy something that drops in price right after you purchase it, your credit card company may refund you the difference. If a creditor offers this protection, they will spell out how many days of price protection you have on your credit card agreement.
- Warranties – some credit cards give you a built-in warranty on purchases. They typically offer this on products that already have some kind of manufacturer’s warranty, and the creditor simply extends it by an extra year or so. If this is offered, it’s simply included in the purchase if you use the credit card—no need to pay extra for the extended warranty plan when you buy.
- Insurance – some cards go further than offering an extended warranty, they offer full-on insurance for purchases. You can even have stolen items replaced if they were bought with the credit card recently enough. The most common insurance offered by credit cards is for rental cars, travel, and cell phone purchases. Note that we’re not talking about insurance that pays your credit card bill if you suffer a loss of income—virtually no financial expert advises that you purchase this kind of insurance. But if you can find a card that offers built-in insurance benefits for purchases, it’s a great benefit.
- Free credit scores – while you can get your credit reports for free at annualcreditreport.com, your scores will cost you money. Usually, this runs $15-20 per credit report, so all three of your scores would run $45-60. So if your credit card provider gives you access to free credit scores, it’s a real benefit.
While credit cards have a lot of obvious benefits, they’re still dangerous if used carelessly. We are standing by to help anyone who has fallen too deeply into credit card debt. Get debt coaching today from a certified expert who will help you create a plan to conquer your debts and achieve financial freedom.