Credit cards. Are they good? Or are they evil? Are they an effective way to track and manage your spending? Or are they a road to a mountain of unmanageable debt?
Throw those questions into a roomful of armchair money managers and youll have the makings of a lively discussion. The truth, as with so many things, rests somewhere in the middle. There are times when using a credit card is a great idea and there are times when you should probably keep the cards in your wallet and wait until you can pay cash. And actually, a credit card may not be right for you at all; perhaps your preferred plastic should be a debit card.
There is only one situation in which you should always avoid using credit cards—if you arent in a position to pay your entire credit card balance each month. Carrying a balance on your credit cards puts you in the same position you hear about bloated governments and over-extended corporations being in: a situation where your income goes toward servicing debt rather than into savings or investments.
With that stern warning out of the way, lets take a look at the benefits of using a credit card:
Credit Cards Are Free Money … For a While
When you pay for something with a credit card, you get the item or service about a month before you actually have to part with the cash. While savings account interest rates are low these days, its better to have your money sit an extra few weeks earning a little bit of interest. Just remember to always pay those monthly balances when the bill comes around!
Credit Cards Can Pay You
If youre going to use a credit card, make sure theres something in it for you besides a substitute for carrying cash. Pick your credit card carefully and make sure you get one that does right by you. And you dont have to go for just a deal on airline miles, although those can be great; there are some excellent cash-back credit card options out there, too.
Credit Cards Are Sham Shields
When youre buying in good faith from a website or mail order house, a credit card is a built-in insurance policy against being taken advantage of with merchandise that never appears or a product that in no way resembles the description of what was promised. When something like that happens, contacting your credit card company sets a process in motion that adjusts your account and investigates your situation.
Credit Cards Can Insure Cars
If you use a lot of rental cars, having a credit card with built-in rental car insurance protections is a great way to maintain peace of mind while traveling. And youll also avoid the insurance upcharges they try to sell you at the rental desk.
Credit Cards Build Creditworthiness
Demonstrating a good track record in managing credit card debt is reflected in that credit score you hear so much about. Be sure to officially close any credit card accounts you stop using; open, inactive credit cards can be seen as a signal that you may be a bad credit risk.
So, there you have it. Credit cards dont deserve the bad rap they get in some quarters. But that doesnt mean they should be used for absolutely everything. Disastrous credit card use is a real thing. Lets move on to some examples of when NOT to use a credit card:
Credit Cards Arent Medical Insurance
Theres no doubt healthcare can be costly, but a credit card isnt necessarily the best way to go about managing your medical bills. Simply applying the interest math to the bill for a large procedure is enough to show you the predicament you can get into should you not be able to pay down that debt. There are medical payment alternatives available; discuss them with your healthcare providers.
Credit Cards Arent Coupons
It might sound like a great deal to get an immediate 20 percent off a purchase for opening a store credit card account, but what if you rarely shop at that store? Or the next one? Or the next? You could end up with a pocketful of cards, with random balances that are hard to keep track of, and that run the risk of downgrading your credit rating. Look for sound credit card options with terms that make every purchase you make something of a bargain, instead of just cutting the price tag on a single initial transaction.
Credit Cards Arent Debit Cards
When you use a credit card at an ATM, youre not dipping into your bank account, youre floating a loan from your credit card company. That transaction wont show up on your bank statement, itll show up in your credit card balance, along with interest on that loan if you dont pay it off right away.
Credit Cards Arent Scholarships
The same interest rates apply to credit card tuition payments that apply to everything else that goes on your credit card. Dont run up tuition bills on your cards based on the potential payday from a job you may or may not get later on. And dont use then to pay off student loans. Thats not paying off debt, thats just transferring debt to a lender whose interest rates are likely much higher than the interest on your student loans.
So, there you have it—some of the perspective on when and when not to reach for your credit card. The basic concept is the same as with all spending: plan your purchasing carefully and dont spend beyond your means.
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