4 Reasons You Should Use a Credit Card
June 15, 2007 · Print This Article
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 your 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.
Lets 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 do 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 categories charges online and view the totals for each categories 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.
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.
@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.
[...] If you have financial self discipline, using a credit card can be much safer than using cash or debit cards. Credit cards offer you better protection from fraud. They are also setup to protect your rights as a consumer because you can leverage the credit card company against a merchant who sold you a defective product. In a previous post, I discussed 4 Reasons You Should Use A Credit Card. [...]
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).