Every so often you will come across an article that is either promoting using a credit cards or completely against their usage. The answer to the question “Should I use Credit Cards” is more nuanced than that. Like many of the other topics I’ve covered, the actual decision is very much a personal one dependent on your situation. Today’s post will touch on some of the pro’s and con’s of choosing to use credit cards.
It’s important to start any post about credit cards by recognizing the monkey in the room is that not everyone will be qualified to get a credit card. Your credit score might be too low, your income too low, or maybe you don’t even have a credit score. In exploring whether you should use credit cards I am assuming you can readily obtain a card.
Pro’s of Using Credit Cards
There are many pros of using credit cards:
- Sign up Bonus’s – We collect about $2-3K a year from bonus’ for signing up for new cards. It’s a great way to make extra money if you have control over your finances.
- Theft Protection – In general, a credit card theft will leave you with 0 liability if the number is stolen and 50 dollars if someone steals the card. For a debit card there is a tiered liability limit depending on how long it takes you to report the lost card. This is $50 for 2 days, $500 for 60 days after a statement, and after that there is no cap. Needless to say if you’re not watching debit expenditures closely it can get expensive quick. Even if you do catch it you may end up with a liquidity issue while you get things back in order. Quick Tip: Always keep an eye on debit and credit card charges for signs of fraud.
- Cash Back – Many Credit Cards these days give you cash back. The 1-2 percent cash back you receive is like getting an additional discount on a purchase. Sometimes, but rarely you’ll get a bigger discount for paying with cash, but that’s normally limited to negotiable items.
- Cash Management – You can use a credit card to shift when a bill will pay to get you around a potential short term or, in the case of 0 interest rate cards, long run liquidity issues.
- Builds Credit – Without Credit utilization it will be tough to get a rental car, rent a house, get a mortgage, get insurance, and any number of other things. As such you always want at least one debt instrument in good standing to keep your credit score alive.
- Other Perks – Their are many different varieties of perks related to cards. Often these are based on the category and type of card. Most cards include some sort of rental car insurance. Travel related cards often feature free lounge access, travel insurance, priority frequent flyer status, or even sometimes global entry. Some more exotic perks include: price look back, extended warranty, accident and theft replacement, and even credits for certain types of transactions. There are many to choose from and you could spend hours determine which card is the best for you. I tend to use nerdwallet for this analysis but there are a few sites that will allow you to find the right perks for your situation.
- Allows for some avoidance of fees, though potentially adds different ones. You likely won’t pay an overdraft fee because most cards have a much higher limit then you would have in a debit account. Also many credit card issuers, but not all, will just deny an over draft charge. For those that do charge a fee they can do so only if you opt in. Even then it can be no more then the value of the charge that they decline. Debit Cards meanwhile typically require you to opt out of overdraft capability and thus the inevitable 25 dollars per transaction potential fee. Note going over your limit with a credit card does have one big concern, it can mess up your credit, which is likely a worse fee than the debit card overdraft fee.
Con’s of Using Credit Cards
Credit cards however are not for everyone. Assuming you can even get one due to your credit score there are two very large negatives to consider when determining whether to use credit cards:
- Can Encourage Bad Spending Habits: Simply put, the easier it is to spend the cash the more likely you are to do so. What could be more easy then swiping a card? You don’t need to go to the bank to get extra cash when you’ve spent it all. There is no worry about theft limiting the amount you have available to spend artificially. You don’t even need to have the cash up front. You can get yourself into a real bad position quickly if taken to the extreme.
- Can Destroy your Credit or cost you big money in interest if you follow those habits: The interest on a typical card is usually in the upper teens to mid 20 percent. That means if you rack up debt, your costs for anything you purchased can go through the roof quickly. Not to mention the damaging impact on your credit if you carry a high balance or miss a payment.
What I Do
Now given my personal financial position I always use credit cards. I have found other ways to manage the bad spending habits I have handled earlier like a waiting period for purchasing and asking myself if it is something I truly value. Yet, I also understand these steps are not necessarily fool proof. Everyone’s level of self control is different. I’m here to say there is nothing wrong with avoiding credit cards if it means a better overall financial position. Just remember to keep close tabs on those debt transactions and cash for signs of fraud.
Do you use credit cards or some other form of payment? If so what tricks do you use to avoid the cons of bad spending habits?