When you pay off the balance each month, most credit cards don’t charge you anything. This can be one of the best ways to manage your finances. Below are four reasons you should consider using a credit card.
1. Avoiding Fraud
Debit cards and checks are some of the worst ways to pay for anything. Sticking with credit cards or cash can save you a lot of money.
Pretty much anything you do involves risk. When you carry around $50 in your pocket, there is a risk that you might lose it or get robbed. When you give a credit card to a waitress, there is a risk that she might steal the number. When you write a check at the grocery store, there is a risk that someone might take your personal information and use it to steal your identity. When you carry your ATM card with you, there is the chance that you it might get stolen, lost, someone might watch you type in your pin and then steal it, etc.
No matter what you do, there is an element of risk. What you want to do is minimize your financial exposure. Unfortunately, the two money vehicles (debit cards and checks)that are usually most touted to help keep people out of debt are also the ones that give you the least protection from fraud. Here is why.
Let’s say someone steals your check book or uses the account number to withdraw money from your account. You notice the problem on your next statement and call the bank. You now have to prove to the bank that they need to refund your money and put it back into your account. The money is already gone, you have to try to get it back. In the mean time, your mortgage and car payment are due, but you can’t pay them until you can convince the bank that fraud was committed.
Now assume that your credit card number is stolen. You notice a bunch of fraudulent charges on your statement and you call the credit card company. Normally, they will mark the charges as disputed and work with the merchants to obtain proof that you indeed made the purchases. You will pay the amount of undisputed charges.
Notice the difference? With checks and debit cards, you have to get your money back if it was taken by fraud. With a credit card, the credit card company acts as a buffer. The money doesn’t come out of your account until you pay the bill.
In addition, the information provided on a check gives away a lot of personal information that isn’t present on a credit card. Sometimes checks even have your SSN or drivers license number. These are excellent starting points to get access to your credit or other accounts.
Using a credit card helps minimize your exposure to fraud. There are some very ingenious crooks out there. The more you can do to reduce your risk, the better.
2. Keeping Records
Credit cards are one of the easiest ways to track your spending. When coupled with a program like Microsoft Money or Quicken, you can easily see where your money is going and keep track of how your spending is changing from month to month. Some companies are adding management features into their accounts so you can categorize charges online and view the totals for each category even without downloading them to your computer.
3. Cash Back and Rewards Points
Most credit cards have some type of rewards program. Generally these will give you 1% of the total of your purchases back in cash, points toward airline tickets, gift certificates for stores, etc. When looking for a credit card, compare these reward programs. Some only give you the equivalent of .05% back.
4. Other Benefits
Most cards have a bunch of other benefits that are buried in the fine print and people generally don’t take advantage of. For example, most VISAs have an extended warranty plan. If you buy something with a 1 year warranty and it fails 18 months after the purchase, the credit card company will replace or repair the device for you–even though the original warranty has expired.
Some cards offer a service where they will keep track of all of the warranties on all of your appliances and home electronics. A number of cards give you theft protection if you have an item (that was purchased on the card) stolen within a certain period of time.
Other cards give you travel insurance in case you die or are dismembered (the term they actually use) on a flight paid for with your credit card. Many have insurance that can be used in lieu of the additional insurance car rental companies try to sell you when you rent a vehicle.
Some cards (particularly American Express) offer roadside assistance, travel planning, international travel emergency assistance and even personal concierge services.
Take the time to look through the fine print that came with your credit cards. You’ll probably find a bunch of features that aren’t useful to you, but you may find one or two that are actually valuable and could save you some money.
Originally published June 15, 2007.
Great advice!
Another benefit: Access to executive lounges with free food, drinks at airports with certain cards, like our Gold MasterCard.
@Shalini – I’m going to have to look into that to see if any of my cards offer that perk. Thanks for the suggestion.
The key point here is “When you pay off the balance each month”. 66% of people who have credit cards don’t pay off their balance and $9300 was the average credit card balance in 2004. More than 35 Million people in the US carry a balance month to month. These might be 4 reasons you should, but more the majority of the population shouldn’t. There are tons of reasons you shouldn’t use a credit card.
As for risk, credit cards are far riskier than debit cards. For example, miss your payment due date by 1 day and watch what happens. Credit cards companies can increase your rate for just about any reason they want. While it is possible for your debit card to be stolen, in general banks will give you a provisional credit when you dispute a charge (i.e. credit you back your money).
I heard the other day that the new versions of the games, Life and Monopoly no longer use cash but use Mastercard and Visa instead! Now even children are the targets of their marketing.
I personally hate credit cards and find the disadvantages far greater than the advantages. I would rather pay cash and watch the money leaving my hands knowing that I am in no way slave to the lender even for 30 days until I pay it off.
Trust me, all those “free” perks aren’t free, somebody who can’t afford too is paying for those perks with their 16% interest rate each month on that $9300 balance.
@Larry — This post was based on the assumption that people will pay off the balance at the end of each month and treat credit just like a checking account–you don’t spend more money than you have.
For people without financial discipline, a credit card is a risk for going into debt. From a fraud perspective, a credit card is far less risky than a debt card–particularly a debit card that can function without using a pin.
Personally my risk from fraud is much greater than my risk of not paying off my balance at the end of the month. Your stats would indicate that the majority of Americans are at greater risk of financial mismanagement than of fraud. If you fall into the majority category, then my advice here doesn’t apply.
I heard the story last month about someone who had tried to buy a meal at a fast food restaurant using their debit card. Instead of charging $9, the clerk accidentally typed in $9,000. The situation was eventually sorted out, but the person who used their debit card had $9,000 less to do things like pay their mortgage, etc. I bet they wish they had of used a credit card where their money would have been safe until they approved the payment.
If you have some examples showing that individuals are more at risk from fraud through a credit card than from a debit card, I would be very interested in hearing about them here in the comments. If you are contenting that credit cards represent a debt risk to people with poor financial discipline, I completely agree with you.
My debit card provides fraud protection and cash rewards for non-pin transactions. Although, I use my credit card for most purchases. I do feel saver with that processing period with the credit card, but it can be frustrating waiting to see what purchases are processing on the credit card. The debit card lets me see pending purchases immediately, whereas the credit card takes a few days.
Interesting. My credit card transactions show up pretty quickly on the bank website. Maybe different banks have different lag times.
I noticed I can call the CC company for instant transaction information. Though online it still takes a few days. I try to keep the card balance low just before statement day, which is what the bank reports to the credit bureau. It can be difficult to know what I need to pay when I can’t see what is pending. I try to aim to have around a $500 balance when it reports so it reports as very low utilization, but that can be hard if I have a couple thousand in pending charges post just before statement day. As I am unable to pay more than my current balance of the card online, but in the bank I am able to overpay.
Actually sir you are wrong, debit cards have a single use limit of 1500 to 3000 dollars depending on your bank. Also you should take a look at MasterCard.com/zeroliability. Any MasterCard associated bank cannot hold the consumer liable for unauthorized activity on credit or debit cards.
@Mark – I think we’re having an agreement. My perspective on risk is what you said, debt risk. From a fraud perspective, you’re correct a credit card would provide lower risk purely from the fact the funds don’t come directly from your checking account; however, I am not sure how much lower risk compared to debit card.
In general, most debit cards have a $3000 – $5000 limit. Not saying the $9000 story isn’t true, but that situation is probably very rare and most places now run debit cards as debits and not as credit cards so a pin and verification of the amount is required.
Regardless though, even with the potential benefits provided by a credit card, I’ll stick with the debit card. I just don’t like borrowing money, even for a short period of time.
I have to disagree with some of the things that you explained.
Credit Cards like someone said if you miss a payment for what ever reason, ie..unemployment being the biggest reason. Then of course there’s the house payment, the utility payments, food.
What you are saying is basicly use the credit card like your bank.
That is one of the major problems in this country today. The reason is most people over – spend on the credit cards. Not everyone is fiscally responsible.
One rule that I heard about spending on a credit card is, don’t spend more than what you make in a week. Now if you have a house payment, utilities, insurance, plus food, then most people are going to spend more than what they make in a week.
You say that when using a debit card, and if fraud is committed that it is hard for a person to prove that a crime was committed. I beg to differ, I have had it done to me on a couple of occasions and had no problem with the bank fixing it.
I think you ought to look into it more. Unless of course you are like most people when the buy something and turn around and tell the bank that you didn’t buy it.
The old saying to that is don’t cry wolf to often.
@Theresa – If you have had good experiences getting money back from the bank when fraud is committed with your debit card that is great. However, there are certain legal protections that you have with a credit card that you don’t have with a debit card. You don’t have to believe me, but there really is a difference and yes, I have looked into it. Read the fine print on your credit card terms and the fine print on your debit card terms.
Even if there was no difference, see my story above about the person who had $9,000 taken out of their account at a fast food restaurant. With a debit card they take the money and you have to get it back. With a credit card, it shows up as a charge and you keep your money until your bill is correct.
I seriously doubt that most people buy something and then turn around and tell their credit card that they didn’t buy it. I know there is a subset of the population that does this. If that is who you are most familiar with, then we are talking about completely different socio-economic groups and dealing with completely different levels of self discipline. I would not recommend that you or the people you are most familiar with (the ones who buy things and then tell the bank they didn’t buy it) follow any of this advice. If not missing a payment is a real challenge for you, then don’t use a credit card. Use cash for your purchases.
And don’t use checks either. If you can’t keep track of your spending with a credit card, it is going to be equally difficult to keep track of your spending with checks.
Regarding unemployment: Consider someone who could lose their job today and not run out of money for 10 years. If they are even basically skilled, unemployment really isn’t an issue.
Even someone with much less savings should be able to go 6 months without a job–especially if they became more frugal.
If you use your credit card as free money, then you are going to get in trouble. If you run money through the credit card for added protection and only buy things the same way you do with cash or check, there isn’t a problem–it is just another mechanism to spend money.
You know your own level of financial discipline, employability, savings, etc. The advice on this page obviously isn’t tailored for everyone (see the first sentence in the article).
Speaking as a cashier who actually DID ring someone up for several yards of fabric at $1,000 per yard instead of $10 per yard, and sent the charge through… yeah, that story about the fast food place is entirely plausible.
(Cash registers often have a 00 key as well as a 0 key — if you hit the wrong one, that’s Bad.)
She signed for it and we were done, but I happened to glance at the receipt and noticed the very long number right before stuffing it in the bag. EEEEK!
We gave an immediate refund and it didn’t max out the card. Thankfully she was VERY understanding! It probably helped that I had spent the last 45 minutes working with her to carefully calculate how much fabric she needed…
But imagine what would’ve happened if that were her debit card and we wiped out her account balance? What if I hadn’t looked at the receipt before stuffing it in her bag? Et cetera…
Never mind that people who use credit spend about 20% more on a purchase than they would if they used cash and then pay interest on that. If you bought a couch for $1000 on a credit card and paid the minimum monthly payment, based on the average interest rate, the couch ends up costing about $5000.
Your arguments are lame.
True, but if you would get off your rant and read the article above you, the point of using a credit card to your advantage involves paying it off in full. If you use a credit card and you pay it off in full, that $1000 couch will end up costing you $1000. In fact, if you are using a cash back card or rewards card and you have an interest-bearing account, that $1000 couch may cost you $990 or so.
Your argument is lame
$9000 using a debit card instead of a credit card? If he/she had used cash, none of it would have happened.
Please look at your receipts before you leave the store.
@me – It sounds like you might fall into the group of people who don’t pay off your credit card every month and spend a lot more with a credit card than with cash. So you are right, credit cards may not be a good option for you.
If you did have financial discipline and paid off your balance every month, I think you’d see the benefits. As it is my points seem lame to you because you aren’t the target audience for this article.
My point with the $9000 is that when something like that does happen, a credit card gives you a buffer and someone who can “go to bat” for you.
Also consider that the risk of losing cash is much greater than a credit card. With a credit card, you aren’t out anything. With cash you are out whatever you loose.
As a banker that deals with both debit and credit card transactions on a daily basis, there is a big piece that all of you are missing. Rarely will you find a bankt hat will allow a debit card limit over $100-$1500 because the bank is sharing int he risk of the transactions. The customer can dispute the transaction and there is a chance the bank can be stuck with the expense. On the debit side of the card we limit our exposure to $300 per day and on the credit side we limit our customers to $1000 per day. This is common for most banks. I’ve never know a bank to allow a $9000 debit card transaction. It is too high of risk for the bank.
My bank allowed for a daily purchase limit of $3000.00 on my debit card when I opened it at age 18, I have exceeded that limit without the card being declined or getting a call from my bank. For a long time customer a $9000 limit would be possible.
@Greg – If they have a hybrid card that can be processed as a credit card, but immediately pulls the funds from the account, would they have the same limit?
Yes the bank I work for allows 3000.00 to be done as credit on a debit card and 3000.00 as a debit. For a total of 6000.00 but your bank would be a fool to not give you a call before you reached either limit. Because irregardless of the bank you have a fraud dept monitoring the Accts 24 hours/day
I use a credit card to pay for almost all of our monthly expenses and pay off the balance each month – no finance charges. I use our bank account’s bill pay feature as soon as I know the amount and due date so that I never chance being late.
I have a card that pays me a percentage back for my purchases, so why not get back some of the money that I am spending. Every time I have $100 in rewards, it is used to credit my account.
This system has worked very well for me for about the last 2 -3 years.
Good points here! I’m not that great with a credit card so I try to use mine just for groceries/gas/necessities. It seems to be working out well for me!
Cheeeeeeetah! Run!
It should be pointed out that using Credit Cards is similar to playing with snakes… You’ll eventually get bit, even if you, like me, paid it off every month (until disaster hits). It’s too easy for “disciplined” people to get hurt & I’ve seen hundreds of hurting people because they’ve bought-into the lie that it’s “safe”. I’ve found that my savings has grown much faster now that I use cash & checks… Watch what successful people do… Do “rich people” stuff, get rich! Do “poor people” stuff… you get the picture.
Lastly, the rewards programs VERY seldom add up to anything usable. It’s hard to cash-in the points & even harder to get enough to get anything you actually want (i.e. Spend $200,000 on your credit card, get a free trip).
Better choices: You can now get Debit Cards that give you points, if you have a specific, reachable goal in mind.
@Financial Peace – If you track what you spend on a credit card it is no different than using a checking account. If you think that “when disaster hits” you might write bad checks then I agree–you shouldn’t use a credit card or a checkbook. So if you feel that writing checks is “like playing with snakes” I agree that credit cards fall into the same category.
As far as the rewards, it obviously depends on what card you have and how much you run through it each month. For some people it doesn’t make sense, but the math is simple to figure see if it will help you or not. It has worked out very well for me, but if that was the only advantage of using credit cards I’m not sure if I would use them.
The biggest reason I use a credit card though is because of the protection it offers that you don’t get with a debit card. For me this is very significant.
I recognize your point though. Credit cards aren’t a good choice for everyone. Checking accounts aren’t a good choice for everyone. You have to know your own weaknesses and decide if the advantages are actually helpful or not.
@Financial Peace: I’ve got to agree with Mark, above. So long as it’s managed and tracked properly, I think credit cards are at the same level of risk as debit cards. To me, “disaster hitting” is when you get your identity stolen, which is actually EASIER to manage with a credit card than a debit card.
At the moment, I use my credit card for online purchases that don’t accept direct payment through a bank’s website. This, I find, is one of the most useful purposes of a credit card and not really interchangeable with anything else.
“Let’s say someone steals your check book or uses the account number to withdraw money from your account. You notice the problem on your next statement and call the bank. You now have to prove to the bank that they need to refund your money and put it back into your account. The money is already gone, you have to try to get it back.”
Not true. I live in an area that has rampant fraud going on. I’ve had my bank call ME and tell me they think fraud was being committed. And they were right. I didn’t have to prove anything to anyone. I filed a fraud report and got my money back. My bank has also cancelled my card as an active step to protect me from shady vendors that came up on fraud alerts.
Not once have I ever had to prove to a bank that fraud was committed in order to get my money back. My experience has always been that they take the customer’s side.
Please get your facts straight. Thank you.
@Andrew – I’m glad it worked out well for you. I have heard quite a few people who it didn’t work out for quite like that. It might be different for people who live in areas where fraud isn’t quite as common.
Even in you case the money was taken out of you account and had to be put back. With a credit card, the money doesn’t leave your bank account until you pay your bill.
Great post !
One certain thing if we use credit card is pay the bill on time.
This will up our credibility in front of the bankers and they will increase our credit card grade which will give us more benefit and service.
Use when we really need it otherwise it can be a killer for our financial life.
Good points. Although I still stick to cash over any form of plastic (credit/debit cards) or paper (checks).
This post is an eye opener. Usually people think the other way round. Thanks for such a nice post.
@Roshan – Obviously if you don’t have self control a credit card can be a dangerous thing–of course so can a checkbook.
Don’t use a card to purchase a couch. A couch is a luxury item. If you cannot afford to pay cash for a couch then sit on the floor, or spend your free time at another job to be able to purchase a couch.
If someone steals your cheque book and gets your account number and sort code, the only thing they can do is deposit money into your account or set up a direct debit, they can’t withdraw money so don’t lie..
source(s)
i work for barclays bank
Are you sure? Because I have authorized money to be taken out of my account by giving them my account number and routing number.
Craig, if you work at Barclays bank and are giving customers this information then you are doing them a huge disservice and giving them a false sense of security.
Checks contain many vital elements for a criminal to use fraudulently. Firstly, a check contains your name, address, often times your phone number, the check range you are currently using, your routing number, your account number, bank information and lastly…..this is the big one Craig……..YOUR SIGNATURE! All someone needs to do is print their own box of checks and go shopping. You can also purchase items off of the internet using only at name, routing and account number. It sounds like you need some training and a better understanding of the banking system on paper and electronically. I also work for a bank and it is very disconcerting for me to hear that this is the fraud traning you have received from Barclays.
First of all…
Credit Cards are MORE Dangerous if lost than a Debit Card because with a Debit Card you would need the PIN NUMBER to use it… With a Credit Card you just swipe it and sign a scribble. Most places don’t even check your ID anymore.
I always laugh when I read post like this one promoting the Positive Virtues of using Credit Cards…
You and I both know that using Credit Cards for everyday purchases is not a good idea…
The temptation to make the minimum payment is too strong for most people to pass up. It’s far easier to pay $20 than to part with $300+ at one time so people pay the minimum and say to themselves “I’ll pay it off next month…, Then next month comes and they say the same thing again, and again, and again…
Credit Cards are 100% unnecessary in your life. You can pay for EVERYTHING with a Debit Card or Paper Cash.
Most debit cards now days can be used through the credit card processing network as well, so I’m not sure that the PIN number gives you as much complete protection as you think.
I know that it has worked well for me ever since I graduated from college years ago, and I still have no credit card debt. If you don’t feel it is a good idea for you because you’ll be tempted to pay the minimum payment instead of the entire amount, then I understand your point of view–I just don’t think it applies to everyone. There are some people that suffer with the same issue when it comes to writing checks–they will spend money they don’t have. However, it would be silly for someone like that to say:
I use my credit card purchases for day to day purchases. I have never had a problem with this. I pay off the account whenever I check my accounts online, so several times a month.
I have never paid interest on the account, although I have gotten a few $5 credits from the bank. The last credit was because when I called the credit card company I was on hold for 6 minutes, which to them was unacceptable.
Edit for the extra purchases in the first sentence.
I swear by using credit cards only. I got rid of my debit card. I have been using my amazon.com Visa for like 5 years and they have gotten my money back several times very quickly. I have this image in my head of them grabbing the merchant by the collar and saying they’re going to take rights away to use their credit card as a payment plan if they don’t pay up. I don’t know if that’s true but they’re very powerful like a type of insurance.
Just recently I ordered an item worth about $100. They sent it FedEx, no declared value and no signature required, the merchant said it wasn’t their fault because they had a tracking number, FedEx said it wasn’t their fault because my house wasn’t marked (well neither was whatever house they left it at). I fought with them and the merchant began ignoring me, and FedEx continued saying they weren’t liable for anything but the shipping charge. So I called my credit card company and they said if they can’t prove I received it (I.e. with a signature that they sent as not required) then I was entitled to a refund.
They’ve never failed to get my money back when I was done wrong. And it’s way easier to keep track of spending, and you don’t have to be broke, you don’t spend money until you pay the bill. So long as you are on a budget and aren’t a compulsive spender, credit cards solve all kinds of problems.