Responsible Credit Card Uses
Personal financial professionals spend a lot of time and effort attempting to keep us from using credit cards—and for good reason. Many of us abuse credit cards and wind ourselves in debt. However, contrary to common assumption, if you can handle plastic responsibly, you’re far better off paying with a credit card than a debit card and limiting your cash expenditures. Let’s look at why your trusted credit card wins, as well as specific credit card uses and techniques to utilize.
1. One-Time Bonuses
Nothing beats an initial bonus opportunity when applying for a new credit card. Applicants with strong or exceptional credit are often accepted for credit cards that provide bonuses worth $150 or more (sometimes considerably more) in return for spending a specified amount (ranging from $500 to several thousand dollars) in the first few months the account is open.
Other cards provide additional reward points or miles that may be redeemed for travel, gift cards, retail, statement credits, or checks (more on those below).A conventional debit card that comes with a bank checking account, on the other hand, often provides no initial bonus or continuous potential to earn benefits.
2. Cash Back
Discover pioneered the cash-back credit card in the United States, and the concept was simple: use the card and earn 1% of your expenditures rebated in the form of cash back. Today, the notion has evolved and expanded. Some cards now provide 2%, 3%, or even 6% cash back on certain purchases, albeit such tempting offers are subject to quarterly or yearly spending restrictions. 1 The best cash-back cards have low fees and interest rates while providing a high rewards rate.
Some cards, such as the FidelityRewards card, provide a high 2% cash back return on all purchases, but you must deposit your funds straight into a Fidelity investing account. 2
3. Rewards Points
Credit cards are designed to enable cardholders to earn one or more points for every dollar spent. Many reward credit cards provide extra points for certain areas of expenditure, such as restaurants, grocery, or petrol. Points may be redeemed for travel, gift cards from merchants and restaurants, or other items when specific earnings levels are met via the credit card company’s online rewards site.
Your credit card rewards possibilities are almost limitless. Get a co-branded card from a hotel chain, clothes shop, or even a charitable organization like AARP, and you may use your ordinary spending to earn substantial benefits every day. 3 The key is to choose the card that best matches your spending habits. Changing your purchasing habits to accommodate a certain card might be harmful. However, if you currently spend money with a certain merchant or have a preference for a specific hotel, why not use the card that would promote your continuing patronage by providing you increased points, discounts, and perks?
4. Frequent-Flyer Miles
This benefit predates virtually all of the others. By creating a deal with credit card giant Citibank in the early 1980s, American Airlines started providing its customers an innovative method to earn frequent-flyer miles even when they weren’t travelling. 45 All local and international airlines now have at least one credit card issued by major credit card issuers in a similar agreement.
Cardholders typically get one mile for every $1 spent on net purchases, or one mile for every two dollars spent on lower-tier cards with no annual fee. The value of this award is determined on the kind of airline ticket purchased with your points or miles. Many frequent flyer cards are greatly enhanced by their mileage-based initial benefits. After completing the card’s first spending threshold, they are often enough to get you 50-100% of the way toward an award flight.
Paying using a credit card makes it easy to prevent fraud losses. When a criminal uses your debit card, the money immediately disappears from your account. Legitimate costs for which you have made online payments or sent checks may bounce, resulting in insufficient funds fines and a negative impact on your credit. Even if it was not your fault, late or missing payments may have a negative impact on your credit score. 6 While the bank investigates, it may take some time for fraudulent transactions to be reversed and money returned to your account.
In contrast, if your credit card is used illegally, you do not lose any money; you just tell your credit card company of the fraud and do not pay for the purchases you did not make while the credit card company investigates the situation. 7
Credit card networks such as Visa and Mastercard provide 0% liability coverage for illegal transactions in order to encourage people to use their cards instead of cash or checks. 89
Help with purchase refunds
When customers are unable to settle merchant disputes on their own, credit card providers may assist in resolving refund concerns.
6. Keeping Vendors Honest
Assume you hire a tile installer to install flooring in your foyer. Workers spend the weekend cutting, measuring, grouting, installing spacers and tiles, and allowing everything to dry. They then bill you $4,000 for their time.
You make a withdrawal from your savings account and write a check. But what if, 72 hours later, the tile begins to slip and the grout hasn’t set? Your entrance is now a total shambles, and the vein in your forehead isn’t going away.
You can file a complaint with your state licensing authority, but this might take months, and the contractor will still have your money. That’s why, if possible, pay for a large-ticket item like this using a credit card. The issuer has a motive to deter fraud among its suppliers, and they have a process in place to attempt to handle any issues that arise. More importantly, if you dispute the charge, the card issuer withholds the payments from the tile setter, and you will not only get your money back, but you may also receive assistance in finding a new contractor.10
7. Grace Period
When you use a debit card, your money is gone immediately. When you use your credit card to make a purchase, the funds stay in your checking account until you pay your credit card payment.
Keeping your money for this extended period might be beneficial in two ways. First, the time worth of money, no matter how little, will save you money. Delaying final payment makes your purchase somewhat less expensive than it would otherwise be. Furthermore, by using a credit card instead of a debit card, cash, or check, your money will spend more time in your bank account. You will also earn money during the grace period if you pay your credit card using an interest-bearing checking account. The additional money will soon add up to a significant sum.
Second, when you frequently pay using a credit card, you don’t have to keep a tight eye on your bank account balances.
Most credit cards automatically include a variety of consumer protections that many people are unaware of, such as rental vehicle insurance (which is typically secondary to your own auto insurance), travel insurance, and product warranties that may extend the manufacturer’s guarantee.
9. Universal Acceptance
Certain transactions are difficult to do using a debit card. If you have a credit card, renting a vehicle or staying in a hotel room will almost probably be simpler. Rental car firms and motels prefer credit card payments because it allows them to charge consumers for any damage they do to a room or an automobile. Another problem is that the merchant does not know the whole amount of your transaction unless you have pre-paid for your rental or hotel stay. As a result, the store must reserve a portion of your available credit line in order to protect themselves against unexpected costs.
If you use a debit card to pay for one of these things, the corporation may place a hold of several hundred dollars on your account. 11 Also, while traveling in a foreign nation, businesses may refuse to take your debit card, even if it has the logo of a large bank.
10. Building Credit
If you have no credit or are seeking to repair your credit, appropriately using a credit card can assist since credit card issuers record your payment activity to credit agencies. However, since debit card usage does not show on your credit report, it cannot assist you in building or improving your credit. Even if you must make a deposit to get a secured credit card, doing so may help you establish your credit history and ultimately qualify for unsecured cards or bigger loans.
When Not to Use a Credit Card
Purchasing with a credit card is not always preferable to paying with cash. Retailers accept credit cards to make it easier for you to shop there. However, retailers must still pay a transaction charge to the major credit card providers on every sale. Because a cash transaction represents more to the retailer’s bottom line than an identical credit sale, several merchants provide incentives for the convenience of collecting your cash right away. On a large item, such as a furniture set, the difference may be significant. You will, however, lose the consumer safeguards provided by credit cards.
Other reasons why paying using credit isn’t preferable have to do with you and your spending habits. Using a credit card may not be appropriate for you if you:
- You are unable to pay off your credit card amount in whole and on time: If this happens often, use a debit card (or cash) to avoid acquiring credit card debt and paying interest costs.
- You have a tendency to spend more than you can afford: Using debit limits you to spending money that you have previously earned.
- You can only acquire a credit card with a minimal credit limit, and you struggle to keep the debt low: Extending your credit limit results in pricey fees, and it may also harm your credit score. 12
The Bottom Line
Credit cards are best used by the self-disciplined, who are aware of their capacity to pay the monthly amount (ideally in full) on or before the due date. If you already know how to use a credit card properly, switch as many of your purchases to your credit card as feasible, and just use your debit card for ATM access. If you do, you will be ahead of those who pay with a debit card, cheque, or cash due to the combination of incentives, buyer protection, and the value of cash-in-hand.
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