Why use credit cards? Other payment options, like debit cards and cash, may seem like an easier way to stay within budget. After all, credit cards have a reputation for encouraging you to spend money you don’t have — especially when enticing offers come in the mail.
But here at Money Under 30, we think a good credit card is a must-have. When used responsibly, credit cards can be great for your financial well-being. In fact, smart credit card holders can earn money just by using their card.
So, what are the benefits of credit cards over cash, and how can using one help you come out ahead?
What’s Ahead:
1. They build credit history
Perhaps the most important reason to have a credit card is to build credit history.
You can get a credit card no matter what your current credit score and then use it to build credit. Even if your credit score is low you can always start with a secured card. This makes credit cards a great place for anyone to start building credit.
A good credit score is essential if you plan to borrow money. These scores come partially from your credit card usage. Using credit cards responsibly can help in building credit.
When you pay at least your minimum payment by the due date the bank reports that to your credit file. When you want to borrow money in the future, creditors can see that you have a history of paying your debts on time. And the longer you use credit cards, the more you’ll build your credit history, improving your score even more.
Read more: How credit works
2. They offer rewards programs
One of the biggest credit card benefits are the rewards you can earn. There are almost as many rewards programs as there are credit cards. The trick is to find a rewards program that fits with spending habits you already have. This allows you to earn rewards on your everyday purchases without having to change your spending habits.
You’ll also want to find a rewards program that gives you rewards you’ll actually use. While everyone can benefit from a cash back credit card, you may get more value from a travel rewards credit card. However, a travel rewards credit card is not much use if you don’t travel very much.
Rewards programs can include, but aren’t limited to:
Cash back cards: These credit cards give you cash back on your everyday purchases. Often they have bonus rewards for certain kinds of transactions, such as extra cash back on gas or groceries. You can typically redeem your rewards for statement credits or a check.
Read more: Best cash back credit cards
Points and miles travel rewards cards: These credit cards let you earn points and miles on your everyday purchases. Like cash back cards, you can earn bonus rewards in certain categories. You can redeem your rewards for free or discounted travel. One popular program is the Chase Ultimate Rewards program.
Hotel or airline specific cards: These credit cards allow you to rack up rewards at specific hotels or airlines. While these credit cards can get you big discounts on travel, they are not as flexible as general travel rewards credit cards.
Many rewards credit cards have annual fees. Make sure that the rewards outweigh the annual fee before you sign up.
Read more: Best rewards credit cards
3. They may come with welcome bonuses
Many cards offer welcome bonuses for signing up. These could include perks like bonus miles/points that you can redeem for air travel or hotel stays, or bonus cash back that you can use as a statement credit.
Usually, you have to spend a certain amount on the card within a certain time period to get the one time bonus, so read the fine print. But it’s still an invaluable perk.
Read more: Best credit card sign-up offers
4. They protect against fraud
One of the biggest credit card benefits over debit cards is the level of fraud protection they offer.
Say your credit card is stolen or someone finds your card information online. If the thief starts making purchases, they aren’t spending your actual money. Unlike when someone steals your debit card.
Once you notify the card company of the theft, they’ll put a hold on your card and investigate. You aren’t liable for any fraudulent purchases made in the meantime. Federal law protections for credit card holders keep you from losing cash. Legally, the most you’ll potentially be liable for is $50, but I’ve never heard of a bank actually holding to that. Most, if not all, credit card issuers have a zero-liability fraud policy, you won’t lose anything.
Now say your debit card is stolen. Since debit card funds are instantly deducted from your checking account, any money spent on unauthorized charges will be gone. Automatic payments you’ve scheduled might overdraft as a result. If you report the theft within 60 days, the transactions can be reversed and the money restored. But this takes time and can be much more disruptive than a credit card theft.
Read more: The 5 biggest debit card dangers
5. Balance transfers let you move your debt to a lower rate
Often time, credit card welcome bonuses include a period of time with 0%, which typically includes balance transfers.
Balance transfers allow you to move your debt from one credit card to another. Other debts, like car loans and monthly installment payments, can also be moved to a balance transfer credit card. Keep in mind there is often a balance transfer fee when you do this – 5% is a common fee for balance transfers.
Now, this doesn’t mean you wipe out the debt. You’ll still have to pay what you owe, of course. 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, which will save money on interest charges.
How much you can transfer to your new credit card will depend on your credit line. And if you keep adding more charges to the card, then you’re going to struggle to pay off the debt, even with 0% interest.
But if you do them responsibly, balance transfers can consolidate your debt, lower your interest payments, and make your life easier.
Read more: Best balance transfer credit cards
6. They may come with purchase protection
Consumer protection is a huge perk of many credit cards. If you buy an item with a credit card and later find out it’s damaged or the quality is poor, you can return the item and a statement credit for the amount of the purchase price. It may also cover you if the item is lost or stolen.
Credit cards may also offer extended warranties on electronics, furniture, and other items you hope to use for a long time. In many cases the card doubles the time on the manufacturer’s warranty. Make sure to keep your receipts!
Read more: Best credit cards with extended warranty protection
7. They have built-in grace periods
Source: Giphy.com
Essentially, credit cards offer a zero-interest loan for 30 days or less. Unlike debit cards, credit cards don’t require you to have the funds for a purchase immediately. There’s a grace period for you to make payment arrangements.
This grace period is the time between the end of a billing cycle and the day your payment is due (30 days). During this period, you will not receive interest charges to your balance. But you must pay the balance in full by the due date. If you don’t, then all the accrued interest will apply to your account.
Use this grace period wisely. Even if you pay the bill on time, but not in full, or if you pay it off in full, but not on time, then the interest-free grace period is over.
Read more: How grace periods work (and how to make them work for you)
8. They track your spending for you
Want to budget better? Credit card statements are a built-in expense tracker. Your purchases get 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.
This benefit 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 more tricky tax return areas all show up on a credit card bill.
Read more: How to budget using credit cards
9. They tack on insurance
Check out the consumer protections offered with your credit card. Chances are you’ll find credit card benefits you didn’t even know you had.
In addition to extended warranties and purchase protection, many cards offer return protection, rental car insurance, and travel insurance.
Travel reward credit cards are known for providing some pretty sweet travel insurance perks. For example, several Chase credit cards offer primary rental car insurance. Meaning that you can decline the rental car insurance at the counter and use the insurance provided by your credit card instead – without having to involve your personal car insurance company if you need to make a claim.
Many credit cards also offer trip cancelation or interruption insurance. This means that if you have to cut your trip short, or cancel it completely, you’ll get reimbursed for your costs. Of course, the trip needs to be canceled or interrupted due to covered events, such as illness or injury.
Read more: Is it worth it to get a credit card just for the insurance benefits?
10. They’re universally accepted
Speaking of travel, your credit card is your best friend when you’re traveling. Accommodations and rental cars are much easier to book with credit than debit. Rental services generally place a hold of a few hundred dollars on your card. This hold can be inconvenient with a debit card.
Credit cards are also more readily accepted than debit cards worldwide. If you’re traveling to a foreign country, plan to use the lower exchange rates on your credit card instead of paying high exchange rates for cash at airports. Keep in mind that many credit cards charge foreign transaction fees – however not all do, so check before travel.
Read more: Best credit cards for international travel
Disadvantages of using a credit card
While credit cards come with a lot of convenience and flexibility, there are some cons of credit cards that you need to be aware of as well, particularly if you’ve had a rocky payment history in the past.
High interest rates
It’s not uncommon for credit cards to come with an interest rate of 20% or even higher. That’s much higher than other forms of debt, like mortgages or car loans. It 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. This leads to an accumulation of debt over time and makes it challenging for you to pay it off.
Potential for overspending
For some people, using a credit card doesn’t feel like “real” money. So it’s easier to lose track of your spending if you’re undisciplined, which can lead to a surprise balance at the end of the month.
Overspending is a common disadvantage of using a credit card. You aren’t limited by the amount of money you have 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 in the future.
Credit card issuers often provide incentives, like cash back rewards or points, to encourage users to spend more with their credit cards. These credit card rewards can be enticing and might lead to impulsive purchases that aren’t necessary or within your budget.
Annual fees
Some credit cards charge an annual fee, which can be as much as several hundred dollars per year. These fees can add up quickly, especially if you’ve got multiple credit cards.
If the annual fees don’t outweigh the credit card benefits then you’ll want to start looking for another credit card. If you don’t travel very much then travel rewards can be difficult to redeem. Travel rewards credit cards also tend to have the highest annual fees.
If you find yourself in this situation then look for a rewards card with more straightforward rewards.
Read more: Is an annual fee credit card ever worth it?
Incentives and rewards can have conditions
Credit card issuers offer incentives and rewards to entice people to apply. But sometimes there are caveats that make it difficult to take full advantage of the rewards.
For example, a credit card may advertise up to 5% cash back, but if you read the fine print it’s only on certain rewards categories or up to certain spending limits.
Another common condition is to have rotating rewards categories. Each quarter the categories you can earn rewards in changes and you need to register each quarter to qualify for the extra cash back or bonus points. It’s easy to forget to register or the bonus categories aren’t always going to fit into your spending habits.
Irresponsible use can damage your credit score
Irresponsible use of a credit card can damage your credit score. Late payments, high balances, and maxing out cards are all reported on your credit file and can all negatively impact your credit report. This can have long-term consequences.
A low credit score can make it hard to get credit in the future, especially for large items like buying a house or a new car.
How to find the best credit card for you
There’s no one-size-fits-all solution when it comes to credit cards. Finding the card that’s right for you will depend on various factors such as your credit history, if you want travel perks or cash back, if you are looking to consolidate your debt with balance transfers, or a variety of other factors.
For example, you might prioritize a card that has no annual fee. Or you might be after a card with a good welcome bonus.
It’s a good idea to carefully examine how, and how much, you spend to figure out the rewards card that makes the most sense for you.
MoneyUnder30’s credit card comparison tool can help you quickly narrow down the cards that meet your criteria. Check it out today! Then you can read our reviews to see the pros and cons of each card and make an informed decision.
Summary
Credit card benefits include rewards, protection, and convenience, as well as regular reporting to the credit bureaus, which builds your credit.
The key is to be smart with your card and pay it off each month. Doing that can actually save money and keep you protected from unauthorized purchases. And, depending on which card you choose, you’ll have some nice perks thrown in as well. Just watch those annual fees.
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