Advantages of credit cards
There are many advantages of credit cards over other payment methods. But, several of our recent articles warned against the perils of credit cards. These include getting yourself too deep into debt, paying punitive level interest rates, or hurting your credit score. But what about all of the potential advantages of credit cards? Responsible use can earn you rewards, improve your credit history, and help you temporarily delay paying expenses. Having a credit card credit line can also give you access to liquidity when you need it.
Let’s take a look at three major categories of benefits credit cards have over debit cards.
1. Credit Card benefits & Rewards
Credit card issuers tend to give two major types of rewards for spending on their card: cash back and points. They do this to try to bend your spending habits towards spending on their card. Ultimately they actually hope you won’t pay the full balance each month! When this happens credit card companies earn a high interest rate on the remaining balance.
Your credit card company makes the vast majority of their profit based on if you pay interest on that revolving balance. That is the balance you carry forward month to month when you don’t pay your full statement balance.
Many credit card holders don’t realize this, but the vast majority of rewards programs’ cash value equivalent of rewards is in the 1-1.5% range. You can sometimes do better than that! However, that’s typically for a narrow range of spending categories. It can also be achieved when credit card users have an additional financial relationship with their credit card issuer (e.g. additional checking, investment accounts etc.). Rewards are a great way to get back some of the money spent on your credit card.
There are many different rewards programs to choose from, including the ever popular frequent flyer miles programs. Check out our other articles on this topic:
1. Introduction to credit cards
2. The top 5 credit card types you should know about
2. Improve Your Credit Score & Credit report
Paying off your credit card balance in full each month will help build your credit history, which is a critical factor in your credit score. Paying on time and in full shows that you are a responsible and reliable user of debt. Credit scores are determined by looking at what types of debt and how much debt you have been able to historically manage. This helps companies evaluate if they should extend you additional credit.
Remember, credit scores are not based on whether or not you’re paying interest. Instead they’re based on whether you made at least the minimum payment required on your credit card statement each month. So, make sure you stay on top of your monthly bill and use your credit cards responsibly. Credit card companies refer to this as paying your bill within your ‘grace period.’
A great way to build a strong payment history is to set up automatic payments. But, you may want to make sure you set up a reminder to log in to your online account each month. You will want to review your statement each month before the automatic payment is triggered to check for fraudulent purchases, incorrect transactions, or unauthorized purchases. If this happens to you, you will need to contact your credit card company to have your money restored and/or receive statement credits.
While how a credit report is calculated is beyond the scope of this article, it’s important to remember that one critical factor is your credit utilization. A straightforward way to improve this metric on your credit card is to ask for a credit limit increase from one or more of your credit card companies. This increases your total credit card purchasing power, and holding all else equal, will reduce your utilization.
3. Additional benefits of credit cards
Most cards these days offer several lesser-known, but still valuable benefits, some of these key advantages of credit cards include:
- Credit card fraud protection against fraudulent transactions
- Rental car insurance
- Low or no foreign transaction fees
- Warranties for items your buy
- Roadside assistance
- Purchase protection
- Price protection
- Balance transfers
- Lost of delayed bag insurance
- Free airport lounge access (usually only on cards with high annual fees)
- … and more! Make sure you read the fine print
Additionally, a specialty credit card, like a balance transfer credit card can help you get consolidate and get out of debt, if used correctly.
Bonus: Drawbacks of debit cards
It’s tempting to “just” use a debit card. After all, you might think it’s more responsible to pull money you have straight out of your checking account, savings account, or another bank account rather than delay payment with a credit card billing cycle.
Debits cards do not typically offer rewards
Your debit card does not earn rewards or cash back. There are almost no debit card rewards programs in existence! They also don’t typically have any enhanced rewards or fun perks like lounge access either. Since most merchants are used customers using their credit cards these days, prices tend to include the 1-2% processing fee credit card companies charge merchants. So you’re not recapturing any of that when you use your debit card.
No ‘credit’ for using your debit card responsibly
Since no “debt” is incurred on your debit card no reports are made to credit bureaus. In this way, debit cards lose out on the opportunity to build credit just through everyday purchases, business expenses, and online purchases made on your credit card.
Conclusion: There are many advantages of credit cards
There are many credit card benefits, but most require using your credit card responsibly. Make sure you’re doing things like avoiding late payment fees and paying your credit card bill on time and in full every month.
Credit cards can be a great tool and there are many advantages of credit cards. But, they can also get you into trouble fast with interest charges, unnecessary processing fees, card issuers letting you spend money too much, and sometimes an annual fee you can’t actually afford. Makes sure you consider all the benefits, the consumer protections offered, and use your card to earn reward points, earn money, save money, and stay out of debt! Remember your card issuer is not your friend!