I still remember sitting in one of my college accounting classes and my professor announcing that we were going to talk about credit cards that day. I remember thinking, “this should be a short discussion — he’s going to tell us that credit cards are bad and that we should never use them.” I was wrong.
Instead, he said that he loved credit cards and laid out all the reasons why he loved them, including the fact that his credit card rewards points had recently paid for his entire family to have a great vacation in Hawaii.
Out of all of the lectures I ever listened to in college, the “credit card lecture” was by far one of most interesting, eye opening, and useful. I now see credit cards as a means to help achieve my personal and financial goals.
Credit Card Pros and Cons
Let’s cover some basics before we get to the really interesting stuff.
Credit Card Benefits
You can use a credit card just about anywhere, including overseas, over the phone, and online. Credit cards take up less space than a thick wad of checks or cash. Additionally, some merchants won’t accept cash (i.e. hotels, airlines and car rental agencies)
Carrying a credit card around is much safer than carrying around a lot of cash. If someone steals your wallet with $1,000 cash in it you are out of luck. If someone steals your wallet with your credit card in it your liability is generally limited to $50 if you report it promptly, and many credit card companies will even waive that.
Using a credit card abroad can help you avoid the hassle of having to convert your currency. If you will use your credit card abroad, I recommend obtaining a credit card that charges no fees for international use.
Making purchases on a credit card may help protect you if you have to deal with a billing error or defective goods.
Credit cards help people build credit. Responsible use will also likely boost your credit score. Credit can help you obtain insurance, a mortgage, an auto loan, and other credit on favourable terms, potentially saving you tens of thousands of dollars over time. It can also help you land a job or a place to rent.
Credit Card Rewards
Earn cash back, flights, hotel stays, gift cards, and other great rewards. Make sure that you understand all of the conditions and terms of the rewards.
Financial Safety Net
At some point in our lives, we will all unexpectedly have a roof leak, a car break down, or a large medical expense. Credit cards can come in handy if there is an emergency that requires a purchase or expense that exceeds your emergency fund.
With credit cards, there is a lag between when you make a purchase and when your credit card payment is due a month or so later. This is basically an interest free loan. During this lag, your money is (hopefully) generating interest income for you in your bank account. If it’s not, open up an online savings account, online money market account, or interest checking account that pays you better.
Credit cards may have other random benefits, such as extended warranties, travel insurance, or car rental insurance. Make sure you understand any applicable restrictions. I once had the chance to attend the Olympics. Due to a Visa card I owned, I was given access to the Visa Olympic VIP Lounge, which was awesome.
Credit Card Disadvantages
High Interest Rates
Credit card companies charge ridiculous interest rates if you carry a balance. To avoid this, pay your card off in full each month.
Ease of Use
The ease of use tempts some people to spend money they don’t have.
Credit Card Fraud
Your credit card number could be stolen and used by thieves. This is a form of identity theft. However, generally a credit card company will limit your liability to $50 or even $0 if you report the loss promptly.
Unwise use of your credit card can hurt your credit score.
Some credit cards come with fees. Some charge fees for balance transfers, annual fees, late payments, etc. Make sure you understand any and all potential fees before opening a credit card.
Benefits & Disadvantages
If you carry a balance on your credit cards because you don’t pay them off in full each month, then the disadvantages outweigh the benefits and you should not use credit cards. Let me say that again so that we are all clear: if you don’t pay your card off in full each month then you should probably not use a credit card.
However, if you choose a good credit card, use it responsibly, and only use your credit cards for purchases that you would make anyway, then the benefits greatly outweigh any disadvantages. In fact, you get to enjoy all of the benefits without virtually any of the downsides.
My First Credit Card
I opened up my first credit card at my local bank (it paid awful rewards) in order to establish credit. My auto insurance agent had correctly told me that I could lower my auto insurance premiums by establishing good credit, so I opened up a credit card.
My Second Credit Card
I’m not proud to admit this, but the second credit card I opened up in college I only opened up to receive the free pizza that came with it. There was a guy with credit card applications outside of the pizza shop near my apartment. Being a poor student, I opened up a card to receive my free $5 pizza.
I’m guessing that makes you want to hire me as your CPA right now! I know, not my finest moment.
Surprisingly, it actually ended up being a pretty good card (much better than the cheap pizza). Fortunately, credit card rewards offer much more than a lousy pizza these days.
My Personal Credit Card Strategies
I use several credit card strategies which I share below.
I have used a multi-card strategy for a long time now, which helps to maximize my rewards. Since the specific cards change from time to time, I’ll give you a hypothetical example of the cards I may carry at any given time.
- A card that pays 5% cash back on purchases made in various purchase categories that rotate throughout the year, such as the Discover it™ Card. I use this card for any purchase that will earn me 5% cash back.
- A card that pays 1% or so cash back on all purchases, such as the IberiaBank Visa® Gold Cash Back Rewards Card, which I use for everything except the purchases mentioned above.
Using this strategy, I generally have a few special cards that pay awesome rewards for certain purchases and then another rewards card that pays pretty well for all other purchases. None of the above mentioned cards charge an annual fee.
Since credit card companies tend to change the rewards they offer over time (i.e. they may offer 5% cash back for a while and then later reduce it to 2%, etc), I change my cards from time to time to make sure I am getting the best rewards possible.
Sign Up Bonus
In addition to the cards listed above, I often times have another credit card with a big sign up travel rewards bonus.
Some credit card companies offer huge sign-up bonuses to entice people to sign up for their credit card, knowing that they will likely recoup that money fairly quickly in the form of interest and fees.
I choose to beat them at their own game—sign up for the card, take my family on a special vacation on their dime, only charge expenses I was going to charge anyway, pay it off in full every month, and then cancel the card if I no longer want it. I then repeat this process.
My wife and I recently opened up the same airline credit card. The points we received from those credit cards paid for several roundtrip international flights and about a dozen nights at 3, 4, and even 5 star hotels in Europe. We paid annual fees of $200 ($100 each the first year), used up all of the points in that first year, and then cancelled the cards. Many of those hotels cost more than $200 a night, so I think we received our money’s worth.
You can find a number of credit cards with great sign-up bonuses by going to CreditCards.com and searching the travel cards.
In order to be eligible for credit cards with great sign up bonuses, you will likely need FICO scores (the credit score the credit card company will likely see)of at least 700, so make sure you know what your score is and that you keep it high. There is a small fee to check a FICO score, so I wouldn’t check it too often.
This strategy may not be right for everyone, and I definitely wouldn’t recommend opening a bunch of new credit cards right before taking out a mortgage, but I’d be lying if I said I don’t love doing this.
Doing this has never hurt my credit score. Opening up additional cards increased my overall credit, as well as reduced my overall spending to credit limit ratio since I made the same amount of purchases over more cards—both things that helped my credit score and likely cancelled out any negative effects.
Pay No Interest for 12 Months
My wife and I once had to make a very large purchase that exceeded our emergency fund. I opened up a credit card that charged 0% interest for 12 months. I made sure I paid everything off within the year. This strategy is not appropriate for everyone, and I hope I never have to do it again, but it saved me a lot of money and I’m glad I did it.
Pay with Cash in Exchange for a Discount
Some stores will give you a discount if you pay in cash rather than with a credit card. They do this so that they don’t have to pay the merchant’s fee to the credit card company. If the discount they offer you is greater than the credit card rewards you would earn on the purchase, then it is a good deal. Many stores don’t offer this, but it doesn’t hurt to ask.
I did this when I purchased my wife’s wedding ring. The discount I was offered was more than twice the credit card rewards I would have made on the purchase.
Recover Credit Card Fees
Many people don’t know this, but credit card issuers charge merchants for the privilege of accepting credit card payments. This fee is normally 2 – 4% of the total transaction price.
These costs are of course passed down to consumers in the form of higher prices. This means that the items you buy each day have likely been marked up, regardless of how you choose to pay.
Credit card rewards help you recoup some or all of that money. By not using a credit card with good rewards, you are paying higher prices and passing up the opportunity to get some or all of that money back.
The Cost of Not Paying with Plastic
Here’s another way to think of it. Think of all the purchases you will make over your lifetime. I’m guessing for most people that will easily amount to hundreds of thousands of dollars, if not millions. Now imagine someone giving you 2-5% of that number back. If you aren’t taking advantage of credit card rewards, you are throwing away this free money.
Credit cards have helped me receive thousands of dollars of cash rewards and thousands of dollars of free travel rewards.
Additional Credit Card Tips
- Credit cards can be a great personal finance tool. However, don’t use them if you won’t pay them off in full each month.
- If the temptation to use a credit card unwisely is too great, consider using a good rewards debit card. The rewards may not be as good, but it’s better than paying interest on a credit card balance.
- Find credit cards that are appropriate for you given your needs, lifestyle, and spending habits.
- It is important that both spouses develop credit. I’ve heard of couples where only one spouse had credit, and when he or she passed away, the other spouse was unable to obtain credit on favourable terms.
- Set up automatic payments so you don’t forget to pay off your cards in full each month.
- Create a budget and stick to it. If beneficial, consider using software such as Quicken to help you keep track of your spending. I personally use Quicken and like it since it allows me to easily download and review all of my credit card expenses at the touch of a button, track my spending, and then compare it to by budget.
- If you currently carry a credit card balance, take the necessary steps to get out of debt. Then stay out of debt.
- Look around for the most appropriate and best credit cards for you. Use credit cards that will provide the best bang for your buck, given your spending habits and specific circumstances. Don’t settle for a card that pays lousy rewards or for the first credit card offer you receive in the mail.
- Take measures to prevent identity theft. Report any suspicious activity immediately to your credit card company.
- Develop a good recordkeeping system to help you stay on top of your purchases and finances.
- Avoid credit cards with annual fees unless the rewards make up for it.
For additional credit card insights, consider reading the following books:
- The Skinny on Credit Cards: How to Master the Credit Card Game
- How You Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line
So, are credit cards bad? Do you love them or hate them? What credit card tips do you have? Leave a comment below!