Most people you come across that have do not have their finances in order will most likely tell you to never get a credit card, how bad they are and how you can easily become in debt by getting one. All of which is further from the truth in my opinion. I would argue the opposite and how important it is having one especially at a young age given you have followed my advice so far and have developed a new mindset on how you view money.
Over 80 percent of U.S. households have at least one credit card. The reason is clear: Credit cards offer enormous advantages over other methods of payment. Although the danger of overspending with a credit card and running up major interest charges exists, those cardholders who use their credit card wisely can experience major benefits. That goes for even those credit cards that do not offer cash back, frequent flier miles, or other rewards programs. Although credit cards get a lot of bad press when it comes to personal finances, they do offer a number of positives that, for the right people, make them an excellent financial tool. The assumption, of course, is that you pay off your credit card balance every month. If you fail to pay off the credit card balance every month, the amount you pay in interest will quickly negate a lot of these advantages.
This is the point I want to make EXTREMELY clear. You need to PAY OFF YOUR ENTIRE BALANCE IN FULL EVERY MONTH. You need to have the financial discipline to do this if you still do not have it I urge you to please move onto another article or read one of the many books I have recommend in the Finance Friday posts to get you in the right mindset. I will go into more details but please if you take anything away from this article it is that one key thing.
Using a Credit Card like a Debit Card
Before I get into the benefits of having a credit card I wanted to share with you how I personally view credit cards. With most credit cards, interest isn’t charged on any purchases until after the due date for that month’s statement. That means that if you use your credit card as if it were actually a debit card you are only spending money that you have and paying off your charges in full each month before the due date, you’ll never pay a penny in interest. Plus, credit cards have more purchase and fraud protections than debit cards, making them safer to use.
Let’s look a little deeper into how that works.
Any time you borrow money, whether you’re financing a new car or appliance, or putting something on your credit card, that amount borrowed (or spent) is a loan’s “principal.” Every loan has an interest rate associated with it. The pre-determined annual percentage rate, or APR, determines how much interest you accrue on a loan’s principal each month.
When you use a credit card, each time that account’s monthly statement closes, you’re given two important numbers: a statement balance, and a minimum payment amount due. The minimum payment is usually much lower than the overall balance. If you haven’t been carrying a balance from month to month, it’s just a percent of your statement balance for that month. If you have carried a balance, the minimum payment is usually all of the interest accrued that month, plus a much smaller percent of the principal.
If you only pay the minimum, then the next month, you’ll have to pay interest charged on whatever of the principal was left unpaid, plus a percentage of any new purchases you’ve made. Beyond that, because of the way that interest rates and APRs are structured, if you only pay the minimum amount, it will take a very long time to finish paying off your principal — and you’ll have to pay extra in the form of interest for that whole time. However, if you pay the full statement amount, you won’t be charged any interest. This is the key concept of this entire post. Making sure you are paying off your entire statement in FULL every month so you benefit from the rewards points that these credit cards can offer. I see it as beating the big banks and credit card companies its a small win but it feels great.
You should only charge purchases that you’d be able to afford in cash — in other words, use your card like a debit card. So now that we have established the main point lets get into the benefits.
So why should you use a credit card?
1. Boost Your Credit History and Score
Getting a credit card will help establish and improve your credit history, as well as increase your credit score. Your credit score can affect a wide range of payments, and the better your score, the less interest you will have to pay. A high credit score may mean you pay an interest rate several points lower on a mortgage loan than the rate someone with a poor credit history would pay; this can mean thousands of dollars in savings over the life of the loan.The same is true with an auto loan. A good credit score can mean paying less on many insurance products, such as homeowner’s insurance and auto insurance. It can even be the difference between getting a job or not, since many employers now pull potential employees’ credit scores and eliminate those with poor credit histories. Establishing a good credit rating by showing responsible use of a credit card will mean significant savings during your lifetime compared with those with a poor credit history or none at all.
2. History of Purchases & Budgeting
For those who are not good at keeping track of their receipts, a credit card gives you a complete and detailed summary of your spending each month without the effort of recording every purchase as you would have to do if you paid in cash. This record can be an easy way to help you create a budget and know where your money is going. It can also be an excellent reference at tax time for charitable deductions.
3. Merchant Protection
If you pay in cash when making a purchase and the seller doesn’t come through, you’re basically out of luck. Your other choice is to pursue getting the money back on your own, which will entail both time and money. If you pay with a credit card, however, you have a good chance of getting your money back, and the credit card company will do the majority of the work. You can simply call the credit card company and dispute the charge. The credit card company will then do an investigation and issue a charge back if they find in your favor.
4. Insurance on Purchases
Many credit cards provide insurance on items you purchase for a certain time period. You must read the fine print of your credit card’s terms of agreement (or give them a call) to see exactly what type of protection your credit card provides. This means if something gets broken, lost or stolen shortly after you purchase it, you can often get your money back. If you paid in cash, it would be gone forever.
5. Convenience When Traveling
Traveling, whether in the U.S. or abroad, costs a lot of money. A credit card provides a convenient way to pay for these travels so that you don’t have to carry a large amount of cash with you. A credit card can also provide easy foreign exchange when traveling abroad at rates that are typically better than you can get from banks in the same country (although you need to be careful of foreign exchange fees the credit card may charge).
6. Earn Rewards or Cash Back
My favorite perk of them all is by spending money you were already going to be spending anyways is by earning cash back, rewards, or points on purchases you make. While other benefits of having a credit card may take a while to enjoy, the rewards you might earn can be enjoyed as soon as you’ve earned enough rewards to redeem them for something great such as free flights. There are a ton of credit cards out there that you can save money on groceries, gas, flights and travel when using the credit card to make the purchase.
Who Shouldn’t Have A Credit Card
Although for most people, it’s probably a good idea to have one of these in your wallet. Which is why I hope as you continue to read through my blog that you change your mindset on how you view money. However, as with anything else in life, they’re not for everyone. That being said, if you have any of the following bad habits, you shouldn’t get a credit card until you clear them up.
- Poor Spending Habits – If when you put $100 in your pocket, it all of a sudden catches on fire and burns your leg until you spend it, credit cards are not good for you. The reality is, it’s easy to overspend using them, and if you’re already in the habit of overspending, it’s probably best you stay away from them entirely.
- Poor Bill Pay Habits – Credit cards impact your credit score. Using them in the wrong way could really cause some damage to your credit report. Not to mention, late payments lead to higher “default” interest rates. If you’re not the type of person that makes it a point to pay your bills on time, every time, credit cards may not be for you. Always remember that your credit card can really affect your credit history if you can’t pay your balance on time.
Credit cards can be wonderful financial tools that offer some great benefits for those who use them to their advantage. If you have the discipline to pay off your balance each month, carrying a credit card makes great financial sense.