Credit cards are dangerous and fun all at the same time. I love credit cards for reasons I’ll outline in this post; but it would be irresponsible for me as a financial advisor to talk about all the goods, while leaving out the bads and the danger that comes with credit cards.
Although they are not as evil as Dave Ramsey would lead you to believe, they do have some evil tendencies associated with them.
The first downside, and maybe the most evil in my opinion, is the potential to influence your spending habits. I’ve heard the idea that swiping a credit card feels like spending “fake” money, or it's so easy that it doesn’t bring them any thought before doing so. If you need to test this theory, I would. If you’re spending more due to the credit card, then the convenience of having it isn’t worth it.
It also doesn’t give you the excuse to avoid setting a strong financial foundation. Your credit card is not your emergency fund - that can become a very slippery slope.
As somebody with a good credit score, even the interest rates on my cards are >20%. It doesn’t bother me because I’d never let a balance go unpaid, but if you’re using it as a bridge until your next paycheck, you’re going to get whacked with interest and penalties that will continue to snowball until you pay it all back.
Misuse of your credit card will have a bigger impact on your credit score to the downside than responsible use of the credit card will have to the upside.
In my opinion, you have to earn the right to use a credit card. Step one is to make sure you have a strong financial foundation and the credit card is solely for convenience and other perks, not as a way to borrow money that isn’t yours.
With all that said, here are some ways I use my credit cards and the benefits I receive through them.
Points / Rewards
This is the classic argument for credit cards. And I’m here for it! The banks prey on us to borrow money from them every way possible to charge interest and fees, so let's get this small win and enjoy some money coming our way.
The bank still makes money on credit cards because of the people who spend to get the points, but can’t pay off the balance. This immediately takes away any benefit you would have received - and you would have played right into the bank's dirty hands.
But, assuming you spend only what you can pay each month, the rewards typically come in a few forms including upfront bonuses, ongoing rewards for spending, loyalty perks like discounts on flight food/drinks for airlines or a statement credit for TSA precheck, etc.
I don’t think I have to do any more convincing on this part since anybody who uses a credit card loves the points that come with them.
I would suggest getting credit cards that align with how you spend. For me, I have a classic Citi Double Cash Card, which gives me 2% back on everything I spend. I say classic because 2% on everything is pretty good, and I know how much I’ll get the 2% no matter what I spend it on. This will be my staple credit card over the long-term to keep a credit line open and continue to build my credit history, which will have a positive impact on my credit score.
I also have a Capital One Savor One Card that I share with my girlfriend. This gives 3% back on bars / restaurants, groceries and entertainment. We spend a lot on those things together so this is a way for us to get a little bit back on our spending and use it for more fun.
Grace Period
There is a grace period when you spend on your credit card, which means it is not immediately due when you make the purchase. In other words, I don’t need to know the balance of my checking account every time I make a purchase. True to the name of the card, you are buying on credit. You are borrowing the bank’s money until they send you a bill to pay what you borrowed.
The first benefit here is as I mentioned, no need to check your account for each purchase. The second benefit is the time value of money.
I agree this is a little cheap and probably doesn’t move the needle for most (or anybody), but I think it adds to the convenience. If my billing cycle is May 1st - May 31st and I buy a mattress (they’re expensive!) for $1,000 on May 2nd, that charge won’t show up until my May 31st bill, which will be due some time in late June.
Having that $1,000 in my checking account for an extra two months may make me $0.01 in today’s world, but the ability to pay that $1,000 whenever I want over the next 6 - 7 weeks is the flexibility that I love.
Protection
If your card is stolen, or if there is fraudulent activity on your card, the burden to resolve this is not on you! You can dispute the fraudulent charge on your card with the credit card company, and allow them to resolve it on their end. There is no need for you to track anything down or wait for a refund.
Fraud doesn’t happen too often, but in other situations this can be handy. One time I ordered some food to be delivered. I was trying to take advantage of a promo-code and ordered some peanut M&Ms. The vendor told me it was delivered, but it clearly was not at my front door. When I called they said they couldn’t reverse the charge so I just disputed it with my credit card and moved on with my day (but unfortunately without M&Ms).
Additionally, some credit cards have additional perks to them like travel insurance, rental car insurance, free international transactions, and other protections that may be relevant to your lifestyle.
One Aggregate Bill
After my cash back, this is my favorite perk of a credit card. The account tracks your spending for the full month, or billing period, and gives you a summary every single month in the form of a bill, outlining every transaction.
The first benefit is the summary of your spending. Every month, I look at my statements and run through the transactions to make sure everything looks right. I don’t compare receipts or anything like that, but I like to check and make sure all these charges look like mine, and if anything stands out.
This helps me to see trends within my spending, and start giving me an idea of how much I spend each month by keeping it summarized into one number at the end of each billing cycle. If somebody were to ask me how much I spend each month, I feel really confident with my answer.
This also brings up the second benefit of using a credit card and one of the major drivers of convenience in my opinion: one charge out of your checking account. I don’t have to check the balance each month. I receive the bill, review it, make sure I have enough in my account, and then schedule the payment. That is it!
I like the process of reviewing my bill and scheduling a payment manually every month. I don’t buy into the autopay with my credit cards - autopay is what can cause excess spending in my opinion. I find having awareness of your spending is what really helps you to keep it in check, and automating the credit card bills takes away that awareness by not reviewing it first.
Final Thoughts
There can be a love / hate relationship with credit cards, but make sure you’re setting yourself up in a way to only love them.
The convenience of credit cards is something to desire, but the convenience needs to be earned by taking steps to be protected and using it in a way that will only benefit you. The card should not be used as a short-term loan, but only when you feel sure that you can pay it off when the bill comes due.