Personal finance experts spend a lot of energy trying to stop us from using our credit cards – and for good reason. Many of us use our credit cards irresponsibly and end up in debt. However, contrary to popular belief, if you use plastic responsibly, you will actually be better off paying with a credit card than with a debit Pay more by card and minimize cash transactions. Let’s take a look at why your credit card is most trusted and some credit card usage strategies employed.
There’s nothing like an initial bonus opportunity to get a new credit card. Often, applicants in good standing, or, excellent credit cards can be approved, offering bonuses worth $150 or more (sometimes more) in exchange for the first few credits to open an account. A credit card that spends a certain amount (ranging from $500 to a few thousand dollars) in a month.
Other credit cards can lure applicants with bonus points or miles that can be redeemed for travel, gift cards, merchandise, statement credit cards, or checks (more information below). In contrast, standard debit cards and bank checking accounts typically do not offer an initial bonus or the opportunity to earn a bonus on an ongoing basis.
Cashback credit cards were first introduced in the US by Discover, and the idea is simple: use your credit card and get 1% back on your purchases in the form of cashback. Today, the concept has matured. Some credit cards now offer 2%, 3%, or even up to 6% cashback on select purchases, although this lucrative offer includes quarterly or annual spending caps. 1Thebest cashback cards are those that charge the lowest fees and interest while offering high rates of return.
Some cards, like the Fidelity Rewards Card, offer a highly discounted 2% cashback & rewards on all spending, but you must deposit cash directly into your Fidelity Investments account. 2
The credit card is set up to allow the cardholder to earn one or more points for every dollar spent. Many rewards credit cards offer bonus points for certain spending categories, such as restaurants, grocery stores, or gas. When certain income thresholds are met, points can be redeemed for travel, gift cards purchased from retailers and restaurants, or merchandise purchased through the credit card company’s online rewards portal.
Your credit card reward options are nearly endless. Partner with a hotel chain, clothing retailer, or even a non-profit like AARP to get a co-branded card and you can use your daily spending to earn valuable rewards day in and day out. 3 The trick is to find the card that best fits your spending pattern. Conversely, changing your spending patterns to fit a particular card can backfire. But if you already spend a lot at a certain retailer or have a crush on a certain hotel, why not use this card to encourage you to keep visiting by giving you higher rewards, discounts, and deals?
This offer precedes other offers. Back in the early 1980s, American Airlines began a partnership with credit card giant Citibank to give consumers a new way to earn frequent flyer miles even when they weren’t flying. All domestic and international airlines now have at least one credit card offered by the major credit card issuers in a similar partnership.
Cardholders typically earn miles per mile per dollar on online purchases, or sometimes at 1 mile per two dollars for low-end cards with no annual fee. How much the reward is worth depends on the type of ticket you purchased with points or miles. Many frequent flyer cards become very valuable with mileage-based introductory bonuses. These are usually enough to earn you a 50% to 100% bonus flight after meeting the initial spending requirements on the credit card.
It is easier to avoid losses due to fraud by paying by credit card. When your debit card is used by a thief, the money in your account is instantly gone. The legitimate costs of your planned online payments or mailed checks can bounce back, causing insufficient funds and fees, and impacting your credit. Even if it’s not your fault, these late or missed payments can lower your income credit score .6It may take time to reverse the fraudulent transaction and restore the funds to your account during a bank investigation.
By contrast, when your credit card is used fraudulently, you don’t lose any money, you must notify your credit card company of the fraud and don’t pay for transactions you didn’t make while the credit card company resolves the issue.7
Credit card networks like Visa and Mastercard offer zero-liability insurance for unauthorized purchases, encouraging people to use credit cards instead of cash or checks.8 9
Credit card companies can also help with chargebacks when consumers cannot resolve merchant disputes on their own.
Say you hired a tiler to lay the floor at your entrance. Workers spent the weekend cutting, measuring, grouting, placing spacers and tiles, then getting the whole thing done. Then they charge you $4000 in trouble.
You withdraw money from your savings account and write a check. But after 72 hours, the tiles start to shift and the grout is still not set, what should you do? Your entrance is a mess right now, and the veins in your forehead keep throbbing.
You can raise this issue with your state licensing board, but the process can take months and the contractor still has your money. That’s why, if you can, you should pay for high-priced items like this with a credit card. Issuers have an incentive to prevent fraud among their suppliers, and if there is a problem, they have a mechanism to address it. What’s more, if you dispute the charges, the card issuer will withhold the tiler’s funds, and you can not only get your money back but even get help finding a new contractor.10
When you shop with a debit card, your money is gone right away. When you buy with a credit card, your money stays in your checking account until you pay your credit card bill.
Holding on to your funds during this extra time helps in two ways. First, the time value of money, no matter how small, will save you money. Delaying final payment will make your purchase a little cheaper than it would otherwise be. In addition to that, by paying with a credit card instead of a debit card, cash or check, your cash will spend more time in your bank account. If you pay your credit card with an interest-bearing checking account, you’ll earn money during the grace period. This extra cash will eventually add up to a meaningful amount.
Second, when you insist on paying by credit card, you don’t have to look at your bank account balance; as close as possible.
Most credit cards automatically come with some consumer protections that people aren’t even aware of, such as rental car insurance (though often a second item to personal auto insurance), travel insurance, and product warranty guarantees that may go beyond the manufacturer’s requirements.
Some purchases are difficult to make with a debit card. When you want to rent a car or stay in a hotel room, you will definitely have an easier time if you have a credit card. Rental car companies and hotels want customers to pay by credit card because it makes it easier to bill customers for any damage they do to the room or car. Another reason is that unless you prepaid rent or hotel accommodation, the merchant doesn’t know the final amount of your transaction. Therefore, merchants need to deduct a certain amount from their available credit limit to protect themselves from potential charges they didn’t anticipate.
So if you want to pay for one of these with your debit card, the company may insist on putting a few hundred dollars in your account.11Plus, merchants won’t always accept your debit card when you’re traveling abroad, even if it has a major bank logo on it.
Using your credit card responsibly can help if you don’t have the credit or are working to improve your credit score, as credit card companies report your payment activity to customers. There are three credit investigation agencies. However, debit card use does not A credit report will appear on your account, so it cannot help you build or improve your credit. Even if you need to save some money to get a check-secured credit card, this can help you build your credit history and eventually qualify for an unsecured card or a larger loan.
Paying with a credit card is not always better than paying with cash. Retailers respect credit cards because they want to make it easier for you to shop there. But merchants are still required to pay major credit card companies a portion of every transaction in the form of transaction fees. Because cash sales mean more to the bottom line than an equivalent credit sale, some retailers will give discounts for the privilege of receiving cash immediately. For example, on a large item, such as a set of furniture, the difference can be huge. However, you’re giving up the consumer protections that credit cards offer.
When paying with a credit card is bad, there are other reasons, and they have to do with you and your spending habits. Using a credit card may not be right for you if:
The most disciplined people on credit cards like that can maintain awareness of their ability to pay their monthly bills (preferably in full) on or before the due date. If you already know how to use your credit card responsibly, transfer as many purchases as possible to your credit card and do not use your debit card for anything other than an ATM. If you do, the rewards, protection buyer, and value of cash on hand will put you ahead of people who pay with debit cards, checks, or cash;
