Credit cards provide many benefits, including rewards, protection, and convenience, if you use them responsibly. While other payment options, such as cash and debit cards, may seem easier to stay within budget, credit cards can benefit your financial well-being. By being an intelligent credit card holder, you can earn money just by using your card. This article explores the benefits of credit cards over cash and how they can help you financially.
1. The Importance of Credit Card Usage
One of the primary reasons to consider having a credit card is the opportunity to build credit history.
Regardless of your current credit score, you can obtain a credit card and use it to build credit. If your score is low, you can start with a secured card. Credit cards are an ideal option for anyone looking to establish credit.
A strong credit score is critical if you plan to borrow money. A portion of your credit score comes from your credit card usage. Proper use of credit cards can help you establish credit.
When you make at least the minimum payment by the due date, the bank reports that information to your credit file. Creditors will see that you have a history of paying your debts on time. The longer you use credit cards, the more credit history you will build, which will improve your score even further.
2. They offer rewards programs
One of the most significant benefits of credit cards is their rewards, which vary according to your credit card type. The key is to choose a rewards program that suits your spending habits so you can earn rewards on your everyday purchases without changing your spending patterns.
Selecting a rewards program that provides rewards you will use is also essential. For instance, a cashback credit card suits everyone, but a travel rewards credit card may be more valuable if you love traveling. However, having a travel rewards credit card is only possible if you travel frequently.
Rewards programs come in various forms, such as cashback cards, points, miles travel rewards cards, and hotel or airline-specific cards. Cashback cards provide cashback on everyday purchases, and you can usually receive bonus rewards for particular kinds of transactions, such as extra cashback on gas or groceries. You may redeem your rewards for statement credits or a check.
Points and miles travel rewards cards enable you to earn points and miles on your everyday purchases, and you can earn bonus rewards in specific categories like cashback cards. You can redeem your rewards for free or discounted travel. The Chase Ultimate Rewards program is a popular option.
Hotel or airline-specific cards allow you to accumulate rewards at particular hotels or airlines. While these credit cards can provide significant discounts on travel, they are less flexible than general travel rewards credit cards.
Many rewards credit cards come with annual fees, so ensuring the rewards outweigh the yearly cost before applying for one is essential.
3. They may come with welcome bonuses
Credit cards often come with welcome bonuses for new customers. These bonuses can include extra miles or points that can be used for travel or hotel stays or additional cashback that can be applied as a statement credit. To qualify for the bonus, you must spend a certain amount on the card within a specified time frame, so carefully review the terms and conditions. Despite this requirement, the welcome bonus can be a valuable benefit for new cardholders.
4. They provide protection against fraud
One of the major advantages of using a credit card over a debit card is the high level of fraud protection that they offer.
For example, if your credit card is stolen or if someone hacks your card information online and starts making purchases, you don’t have to worry about losing your actual money. This is different compared to debit cards where you’ll be spending your own money.
As soon as you report the theft to the card company, they will take steps to investigate and put a hold on your card. You won’t be held liable for any fraudulent purchases made during this period. Federal law also offers protection to credit card holders so that you don’t lose any cash. Legally, you may be held liable for a maximum of $50, but most credit card issuers have a zero-liability fraud policy in place.
On the other hand, if your debit card is stolen, any unauthorized charges will be immediately deducted from your checking account. This means that your money will be gone. Automatic payments that you have scheduled could also overdraft as a result. You can report the theft within 60 days, but reversing the transactions and restoring the money can be a time-consuming process. It can be much more disruptive than a credit card theft.
5. Balance Transfers: A Way to Save on Interest
If you’re carrying a balance on your credit card, you’re probably paying a lot of interest. One way to save money on interest charges is to use a balance transfer.
Balance transfers allow you to move your debt from one credit card to another. You can also transfer other debts, like car loans and installment payments, to a balance transfer credit card. Keep in mind that there is often a balance transfer fee when you do this; 5% is a common fee for balance transfers.
When you transfer your balance, you’ll still have to pay what you owe. However, the 0% APR for the first year will make it easier to pay off what you owe since all the money you’re putting towards it goes against the debt. This will save you money on interest charges.
How much you can transfer to your new credit card will depend on your credit line. It’s important to note that if you keep adding more charges to the card, you’ll struggle to pay off the debt, even with 0% interest.
But if you use balance transfers responsibly, they can consolidate your debt, lower your interest payments, and make your life easier.
6. Purchase Protection May Be Provided
Credit cards often offer consumer protection, which can be a huge benefit. If you make a purchase with your credit card and later discover that the item is damaged or of poor quality, you can return it and receive a statement credit equal to the amount of the purchase. This protection may also cover you if the item is lost or stolen.
In addition, credit cards may provide extended warranties for electronics, furniture, and other items that you plan to use for a long time. In many cases, the card doubles the manufacturer’s warranty period. Be sure to keep your receipts!
7. Credit Cards: Built-in Grace Periods
Credit cards offer a zero-interest loan for up to 30 days. Unlike debit cards, credit cards don’t require immediate funds for a purchase. They offer a grace period for payment arrangements.
This grace period is the time between billing cycles and payment due dates. It’s typically 30 days and comes with no interest charges. However, you must pay the balance in full by the due date. If not, all accrued interest will apply to the account.
Be mindful of this grace period. Even if you pay the bill on time, but not in full, or if you pay it off in full, but not on time, the interest-free grace period is over.
8. Credit Card Statements: The Ultimate Expense Tracker
Credit card statements are more than just a bill of what you owe. They are a built-in expense tracker that can help you budget better. When you make a purchase with a credit card, the transaction gets recorded online with all the essential information — where, when, how much, and how often you’re spending. Some credit card companies keep your spending records around for years, providing you with a comprehensive view of your spending habits.
This feature becomes especially useful come tax time. With one record of the past year’s spending already compiled, you’ll save time and effort on your taxes. Business expenses, rental property expenses, charity contributions, and other tricky tax return areas all show up on a credit card bill. This makes it easier to ensure that you take advantage of all the tax breaks available to you.
In conclusion, with credit card statements acting as your expense tracker, you can budget better and save time when it comes to taxes. So, next time you use your credit card, remember that it’s not just about making a purchase, it’s about tracking your spending too.
9. Credit Card Benefits
Consumers should review the benefits that come with their credit card to learn about available consumer protections. Credit cards often offer benefits beyond extended warranties and purchase protection.
Benefits can include rental car insurance, return protection, and travel insurance. Travel reward credit cards are known for providing valuable travel insurance perks, such as primary rental car insurance. This allows you to decline rental car insurance at the counter and use the insurance provided by your credit card instead. This can save you from having to involve your personal car insurance company when making a claim.
Additionally, credit cards can offer trip cancellation and interruption insurance. This means that if you have to cut your trip short or cancel it entirely, you’ll be reimbursed for your costs. However, it’s important to note that the trip needs to be canceled or interrupted due to a covered event, such as illness or injury.
10. Credit cards are universally accepted
When traveling, your credit card can be your best friend. Booking accommodations and rental cars is much easier with a credit card than with a debit card. Rental services typically place a hold of a few hundred dollars on your card, which can be inconvenient with a debit card.
Credit cards are also more widely accepted worldwide than debit cards. If you’re traveling to a foreign country, consider using your credit card for lower exchange rates instead of paying high rates for cash at airports. Keep in mind that many credit cards charge foreign transaction fees, but not all of them do, so check before you travel.
Advantages and Disadvantages of Credit Cards
Credit cards provide a lot of convenience and flexibility, but there are also some downsides to using them, particularly if you’ve had trouble managing debt.
Advantages of Credit Cards
Credit cards can be an excellent tool for building credit, earning rewards, and accessing cash when needed. Some of the key advantages of using credit cards include:
- Building credit history
- Earning rewards and money back
- Accessing cash when you need it
- Making purchases online and in-person
- Enjoying convenience and flexibility
Disadvantages of Credit Cards
Despite these advantages, you need to be aware of some cons of credit cards. Here are a few of the most common:
High-interest rates
Credit cards can come with high-interest rates, which can quickly add up and lead you into debt if you don’t pay off your balance each month. When you carry a balance from one month to the next, you accrue interest charges on the unpaid balance, which makes it challenging to pay off your debt over time.
Potential for overspending
Credit cards can make overspending easy, mainly if you don’t keep track of your spending carefully. You aren’t limited by the amount of money available in your bank account, only by your credit limit. This can lead to the temptation to overspend and accumulate debt that might be hard to pay off.
Credit card issuers often provide incentives, like cash-back rewards or points, to encourage users to spend more with their credit cards. While these rewards can be enticing, they can also lead to impulsive purchases that aren’t necessary or within your budget.
Fees
Credit cards can come with various fees, including annual, late payment, and balance transfer fees. These fees can add up quickly and make it challenging to stay on top of your credit card debt.
Risk of fraud and identity theft
Finally, credit cards can be vulnerable to fraud and identity theft. If your credit card information is stolen, someone else can use your card to make unauthorized purchases, which can be challenging to track and resolve.
It’s essential to be aware of these disadvantages of credit cards so you can make informed decisions about using them responsibly. By being mindful of your spending and paying off your balance in full each month, you can enjoy the advantages of credit cards while minimizing the risks.
Annual fees
Credit cards can charge high annual fees, as much as a few hundred dollars per year. These fees can quickly accumulate, particularly if you have multiple credit cards. If you travel infrequently, redeeming travel rewards can be challenging, and travel rewards credit cards usually have the highest annual fees. If you’re in this situation, consider switching to a rewards card with more straightforward rewards.
Conditions may apply to credit card incentives and rewards.
Many credit card issuers offer incentives and rewards to attract customers, but these rewards often come with caveats that limit their usefulness. For instance, a credit card may advertise up to 5% cash back, but the fine print may reveal that the cashback only applies to specific reward categories or up to certain spending limits. Similarly, some credit cards offer rotating rewards categories, which change each quarter, and require customers to register to qualify for bonus points or extra cash back. However, remembering to write or finding that the bonus categories don’t match one’s usual spending habits can be challenging.
Misuse of credit cards can harm your credit score.
Using credit cards irresponsibly can hurt your credit score, as late payments, high balances, and maxing out credit cards are all reported on your credit file. This can lead to long-term consequences, including difficulty getting credit in the future, particularly for major purchases like a house or car.
A Guide to Choosing the Right Credit Card for You
Finding the ideal credit card can be a challenge. With so many options available, the best card for you depends on various factors, such as your credit history, preferred rewards, and whether you want to consolidate debt through balance transfers.
If you are looking for a card with no annual fee, consider prioritizing that feature in your search. Or, if you are interested in earning a welcome bonus, you might focus on finding a card with a reasonable offer.
To determine which rewards card will work best for you, it’s essential to evaluate your spending habits and needs.
MoneyUnder30’s credit card comparison tool can help you narrow down the cards that meet your specific criteria. After using the device, you can read reviews to learn more about the pros and cons of each card before making an informed decision.
In Summary
Credit cards offer a range of benefits, including rewards, protection, and convenience, as well as building your credit history by regularly reporting to credit bureaus.
To make the most of your credit card, it’s essential to use it responsibly and pay off your balance each month. By doing so, you can save money and avoid unauthorized purchases. Plus, depending on your chosen card, you may receive additional benefits. Just be sure to keep an eye out for annual fees.