There are two trains of thought when it comes to credit cards. Half of the financial coaches and advisors of the world will tell you they are a great tool. The other half will tell you not to use them. So what does that mean for you? See the arguments for each camp below and choose your side.
Credit Cards are the best thing since sliced bread! 7 Reasons why it pays to use plastic:
- You get paid to use them. Credit card companies offer points or percent cash back when you use their card. This is literally free money/points in exchange for using their method of payment.
- Credit Cards build credit. The first step in establishing your credit is usually a credit card. Lenders see that you can responsibly use credit and that you pay your bills on time. The longer you have your credit card without missing a payment, the higher it pushes your credit.
- Credit cards streamline expenses. By using credit cards, all your expenses are compiled into monthly payments. These payments are due the same day every month. You also see the exact amount a couple weeks before it’s due. Compare this to using cash or a debit card where money is coming out of your pocket or bank the second you make the purchase, making it more difficult to manage cash flow and putting you at greater risk for an accidental overdraft.
- Credit cards essentially give you a zero interest 45-day loan. What I spend with my credit card today is not due until next month. The time value of money states that a dollar today is more valuable than a dollar tomorrow.
- Credit cards can finance an expensive purchase. For example, your car craps out and the mechanic is charging you an arm and a leg to fix it. If the bill is more than what you’ve budgeted for, you’re SOL. A credit card gives the flexibility to pay the mechanic immediately, while also buying time to move money around (i.e. from a savings account) in order to cover the expense and the higher credit card bill that month.
- Protection from theft. If someone steals your cash you’re probably not getting anything back. If they steal your credit card you can quickly call the 1-800 number and have the charges reversed, leaving you without any losses or penalties.
- Credit Cards allow you to spend more than you have. The last benefit is also why many disagree with credit cards. If used responsibly this gives you leverage and helps account for those emergency expenses like crapped out cars. It also allows you to potentially finance something you don’t have money for today but will have money for soon. Credit card debt is very expensive, so try to always pay your bills in full or look to pay off the balance ASAP.
Credit cards are the devil! Two reasons to stick to green backs:
- You spend more when using a credit card. Study after study shows consumers spend significantly more with a credit card than they do with debit or cash. According to a study by Dun & Bradstreet, consumers spend 12-18% more when using a credit card for payment. In another example, McDonalds reports that their average bill for a consumer paying cash is ~ $4.50 vs $7 for credit card toting consumers. Read that again because it’s shocking and important to realize. You most likely will spend more with a credit card. Consciously things seem more expensive when you’re pulling cash money out of your pocket versus swiping a plastic card. It’s also impossible to spend more cash than you have on you. With a credit card, spending money you don’t have is only one swipe away.
- Credit card debt is literally the WORST. It really is. Do yourself a favor and avoid this debt like the plague. It is extremely expensive with interest rates generally between 15-35%. If that’s not enough, credit card companies also enjoy tacking on late fees. No one wants to be in credit card debt, while sometimes it’s a necessary evil for emergency expenses. A full 5/5 Financial advisors agree that paying off this debt is priority numero uno.
So which camp are you?
Say in a pharmaceutical ad voice: “If you can control your spending and are confident that you won’t ever put yourself in a bad situation by spending money you don’t have simply because it’s with a credit card” (super long dramatic sentence) then you absolutely should take advantage of them. The dirty truth is credit card companies make money off the people who don’t know how to use them responsibly. They then re-gift a portion of these profits to responsible credit card users (of course they also generate billions of dollars by charging merchants an interchange fee of ~1.5-3.5% and selling all of our personal consumer data but that’s for another topic).
My personal take
I love credit cards. It’s a form of cash that pays me to use it, streamlines and tracks my expenses, provides protection from theft, and offers financial flexibility. My recommendation is to find the credit card with the rewards or points that most match your spending habits. Once you’ve found the card(s) set each of those puppies to auto pay. I have a checking account that is able to cover 2-3 times my average monthly expenses. I consider this account my “transfer station.” All my income dumps into it and all of my expenses pull out of it. As long as I have enough to account for those months when there is more leaving then coming in, I don’t ever have to think about paying a credit card bill on time. Everything is completely automated. Excess cash I will invest in either savings accounts or other opportunities. My take is don’t be the chump that the credit card companies feast off of, instead be one of the fish following the boat eating that tasty free credit card chum.