I was informed by a friend today that credit cards are the worst thing ever created and that nobody should have them. I hear this tirade more often than not from those who have gotten deeply in debt from misusing credit cards, and who have decided that they’re going to stop using them in order to get their finances in order. I fully support them in taking this step. If you can’t use your credit card in moderation and can’t handle it appropriately when one is in your wallet, you shouldn’t have one. That being said, just because you have an addiction doesn’t mean that everyone else does.
When I hear people say that credit cards are evil, I try to explain that just like most things, they aren’t inherently bad in themselves. it depends largely on how you use them. It’s essential to understand how to use them properly to avoid costly mistakes. This argument rarely dissuades the person who seems to be convinced that all cards are terrible for one and all.
I finally came up with an analogy that seems to get through to these plastic haters to varying degrees. I explain that credit cards are a lot like alcohol. When used responsibly, they can be useful and even good for you. When abused, they can have devastating effects on your life. And while you might need to go cold-turkey and get rid of all your credit cards in order control your personal addiction, making the general assumption that everyone should also do the same is just plain crazy. That would be like an alcoholic going around telling everyone that alcohol is terrible for everyone and it should never be consumed anyone.
Alcohol, when used in moderation, has benefits. Credit cards, when used properly, provide a number of benefits in much the same way. The key aspect for credit cards is that you need to pay off your balance each and every month. If you can do that, you’re going to be financially healthy and gain the benefits that come with having one. If you can’t, check yourself into credit cards anonymous and do what you have to do, but don’t insist that your addiction is one that everyone has. Here are a number of ways that having a credit card can be a benefit without ever having to pay a single cent in interest payments.
There’s one important issue to note which is that all credit cards are different and may or may not offer the advantages I have listed below. It’s definitely worthwhile looking through the information given to you with your card (although it can be a bit daunting) or calling customer service and asking exactly what benefits your card provides. Always confirm that your card offers anything below before assuming it does.
Create a Credit History
While Dave Ramsey doesn’t think that a credit history is important, I most definitely do for a whole bunch of reasons with the primary one being that it’s simply a pain in the butt to do a lot of things when you don’t have one. Credit cards allow you to build a credit history and improve your credit rating without taking on any debt. A good credit score will help you save money in many other financial aspects of your life.
Receive a Product Warranty Extension
Many credit cards offer an extension to the manufacturer’s warranty that comes when you buy a new product. For example, if you buy a new gadget that comes with a one-year manufacturer’s warranty, your credit card may double that warranty so that it’s good for two years instead of one. While most credit cards will offer to extend the manufacturer’s warranty, the length of this extension can vary, so it’s important to check so you know how long your gadgets are really covered for.
Get Extended Return Policies
A service that many people don’t realize they may be entitled to is the extension of the length of time you have to return something to a store. If a store doesn’t have a return policy, this may be your only saving grace. If a store does have one, it’s common for them to limit returns to 30 days, but some cards will extend the amount of time that you can return an item to 60 days (MasterCard)up or 90 days (VISA, American Express). There is usually a limit on the amount that a single item can be returned for ($250 is common) and a $1000 annual limit. This allows you to have more time and flexibility on returns than you would get from paying by other methods.
Receive Price Protection
Another service that many credit cards provide that most people don’t realize come with having one is price protection on the items that they purchase with their card. While some stores will provide price protection on purchases in their store, most people never think that their credit card may also give (or extend) this protection. For example, MasterCard and Visa holders will usually have a 60 day window period after a purchase. If you find the identical item at a lower price at a store, the card will refund the price difference.
Use as an Emergency Fund
Credit cards can also be used as an emergency fund. Since you will be paying off your credit card in full each and every month, that means that you should have the full amount of the credit limit available for you to use each month. While it’s always good to have some cash available that you can quickly access, you can supplement your emergency fund with your credit cards. This can allow you to place some of your emergency fund into higher yielding accounts to earn more interest. For example, if you have $20,000 in your emergency fund and also a $20,000 limit on your credit cards, you may decide to keep $5000 in a savings account and placed the other $15,000 in a higher yielding account that may take a week or two to access. If an emergency happens, you can use the credit cards for payments that need to be made right away and still be able to access the money in the higher-yielding account to pay them off before they become due.
Provides an Interest Free Loan
Most cards have a specific day each month when you need to pay the bill. The result is that you get an interest-free loan from the time that you make your purchase to the time that you have to pay your credit card bill. All this may not seem like a lot of money for each individual purchase that you make, but over your lifetime with every purchase it can add up to a significant amount of money.
Damage & Loss Protection
Many cards come with both damage and loss protection for items that you purchase with the card. That means that if you purchase something which gets lost or damaged within a certain period of time after the purchase, you may be able to recoup your losses through the credit card company. The time periods vary from card to card, so you need to check to find out how long your card covers you. This is a protection that you would not have if you paid for the same item in cash.
In addition to damage and loss protection, many credit cards come with theft protection. If an item that you purchased with the card ends up being stolen within a certain period of time (usually 6 months to a year), many credit cards come with insurance that will reimburse you for the cost of that item. Again, this is something that you would not be able to get had you paid for the same item with another form of currency.
If you have walked through any airport, you have probably seen kiosks selling travel insurance. If you book your vacation with a travel agent, you will probably be asked if you want travel insurance. What many people don’t realize is that some credit cards already come with travel insurance for your vacation if you purchase that vacation with the credit card. This varies from card to card, so you really need to contact your company to see exactly what type of travel insurance they may provide so that you can decide whether it’s enough or some additional insurance may be needed. Either way, you will end up spending less (or nothing at all) for it when you take advantage of this card benefit.
Rental Car Coverage
It’s common for rental cars that are placed on credit card to be covered for collision damage to a certain amount. It’s important to contact your credit card company to see exactly what they do and do not cover when it comes to rental cars, but once you know exactly what they do cover in combination with your own car insurance, you should be able to wave most, if not all, of those extra insurance options that rental car companies try to convince you to buy when renting a car. This can end up being a savings of hundreds of dollars on a single car rental.
Travel & Cash Back Awards
If you pay the vast majority of your expenses each month on your credit card (and then pay off that credit card in full when the bill comes due), you can end up spending quite a bit of money on the credit card each month. In this case, it’s often advantageous to get a card that offers cash back or travel rewards. This means that for every dollar you spend, you’re actually getting paid money back or earning travel rewards. While it’s true that some of these cards come with yearly fees, not all of them do. It’s important to do the calculations if you are paying the yearly fee to make sure that the benefit you are receiving from the card is more than you’re paying. In the end, you are actually being paid for using the credit card in these situations.
One of the benefits that’s often overlooked is the security that comes with using a credit card. Having one allows you not to carry around a lot of cash. If you happen to be robbed, you are only liable for $50 of what might be charged to your credit card, and this amount is often waived if you report your card stolen within a 24 to 48 hour period after it has been taken. It also means that you don’t have to keep a lot of money at home, or carry a large amount with you when you are about to make a big purchase.
Lost Luggage Insurance
Another advantage that credit cards provide when you travel is they often come with luggage insurance. This can be useful since the amount that airlines will pay for luggage that is lost or delayed is often minimal. While nobody hopes to ever have to use this insurance, it can come in handy if you find yourself in a new location without your luggage around. How much luggage insurance is provided can vary from card to card, so it’s important to confirm this before you take off on a trip.
While many people don’t think about it, a credit card can be an excellent way to track your expenses each month and create a budget. If you make all your purchases on the credit card, your card statement can act as a master receipt and free you from having to collect every receipt for every purchase that you make. Your monthly statement will provide an itemized listing of all the money that you spent during the month. There are a number of credit cards, especially American Express, that will actually categorize the different purchases that you make and send out quarterly and annual summaries of these purchases as part of their statements. This will often create a better understanding of where your money is going than most people would be able to create on their not own.
Convenience and Saving Time
When it comes right down to it, credit cards provide a significant amount of convenience. If there is no additional cost to this convenience, it can be extremely beneficial in that amount of time that it saves when it comes to making everyday purchases. While it’s certainly possible to book a hotel, rent a car, or by an airline ticket without a credit card, it’s much more difficult and time-consuming to do so with another method rather than paying with a credit card. The time that is saved can be significant and simply makes certain things like travel a lot easier than when you don’t have one.
(Photo courtesy of TheTruthAbout)