Advantages of credit cards and why you need one When used responsibly , the advantages of credit cards are almost endless. In fact, credit c...
Advantages of credit cards and why you need one
When used responsibly, the advantages of credit cards are almost endless. In fact, credit cards are one of my favorite personal finance topics to talk about because of all the great benefits they offer.
Credit cards are one of those things that get a bad rap because of the horror stories you hear about consumers racking up insurmountable amounts of credit card debt. Don't get me wrong, those horror stories are real and scary, but it's also pretty easy to avoid getting caught in a bad situation.
When you use a credit card the right way, you can take advantage of all the benefits and rewards they offer.
Using it the right way really just means paying it on time and in full each month. You'll hear me say that a few times, because, well, it's that important.
Before we dive in, we'll establish a level of what defines a credit card. If you are already an expert, go ahead and skip to the next section.
What is a credit card?
A credit card, literally, is a small plastic (or increasingly metal these days) card that you can use to borrow from a bank or institution throughout the month to make payments. That's right, every payment you make with a credit card is essentially a small loan.
Then, at the end of the month, you receive a statement from the bank that describes the amount of money it slows you down. It is to be expected that you will then have to return this amount.
The problem is that, unlike regular loans, there is no interest if you pay your balance on time and in full, every month. However, as soon as you start to default, interest charges start to show up.
Unfortunately, unlike regular loans, credit card interest is insane. Yes, crazy. It could be 15% or more. More on that later in the article.
On the positive side, what we will see next are the advantages of using a credit card. Credit cards not only allow you to defer payments until the end of the month, but also provide you with a variety of rewards, perks, and other benefits that make them extremely useful for consumers.
Advantages of Credit Cards
As mentioned, there are countless advantages to using a credit card. We did our best to narrow it down to the top 10; the most important benefits of the credit card.
Let's go straight to them.
1. Cashback and point rewards
The first and most obvious advantage of credit cards is the cash back, rewards programs, and frequent flyer miles they offer. You're basically buying everything that's on sale!
Even the most basic cash-back credit cards will offer at least 1% cashback on all purchases. For a consumer who spends $10,000 a year, that's $100 in their pocket for doing nothing but using their credit card.
Besides, that's just the beginning.
Premium credit cards with annual fees offer rewards programs that are even more generous. They will usually offer more points for spending in certain categories or when redeeming for specific rewards. Kind of a vague sentence, but better explained with an example...
…the Chase Sapphire Reserve is a great credit card that offers 3x points on dining and travel. In addition, they will multiply your points by 1.5 when you redeem them on their travel portal (to buy flights, hotels, etc.). That means you could get 4.5x points (3 x 1.5) every time you eat out!
Not a bad return for simply using a credit card.
To be fair, there is a hefty fee associated with this card, but our credit card tool can help you determine if the benefits of this card (and accompanying Chase Ultimate rewards points) outweigh the cost.
See the best credit cards:
The best credit cards with cash back
The best rewards credit cards
2. Sign up for bonuses
In addition to offering great cash back and rewards when you spend money, many credit cards will offer you a one-time bonus just for signing up.
It makes you feel like a professional athlete who finally signs his big contract!
Well, maybe not, it's not going to be the multi-million dollar signup bonus you've been dreaming of, but it's usually worth up to a few hundred dollars.
That is certainly better than nothing!
See the best credit cards:
The best credit cards with registration bonuses
3. Secondary benefits
Another important advantage of credit cards is the secondary benefits that credit cards can offer. These are benefits that do not offer direct monetary value, such as cash back.
No annual fee card offers fewer of these secondary benefits, but the most common ones to look for include:
24/7 customer service.
No foreign transaction fees.
Fraud protection (more on this later…).
Extended Warranties.
Note: I'm purposely not mentioning things like balance transfers and 0% introductory APR. For someone with current credit card debt, these could be very important benefits, but they shouldn't matter to a new credit card user or someone with no debt.
So their premium credit cards will usually take it one step further and offer things like:
Concierge service.
Travel insurance.
Access to the airport lounge.
TSA pre-check credit.
Free checked baggage when you fly.
And more…
Remember, these are not standard with all credit cards. Most cards offer some variety of them, so pay attention and see what benefits your current or future cards have to offer!
4. Build a good credit history
This perk can be a bit of a cheat.
Credit cards are a great tool to help build good credit. Which can lead to countless benefits in its own right.
Although, first of all, you also need good credit to open a credit card. So where should you start?
First, you can open a secured credit card or a credit card designed for fair credit, both of which don't require extensive credit history. Second, make your payments on time and in full each month. It will take some time, but if you stick to that plan, you'll have a solid credit history in a few years.
After that, you will be able to open better credits with more benefits and more generous offers of cash back and rewards!
5. Consumer Protection
Many credit cards actually offer great consumer protection.
I say "really" because with all the focus on data security these days, I know many people are hesitant to put any personal information online.
Despite that, using a card is still much safer than carrying cash! These are three of the biggest consumer protection advantages of credit cards.
Fraud Protection
Almost all credit cards offer basic protection against credit card fraud. If someone steals your card (or card number) and makes a purchase, you will be reimbursed and you will not be required to pay for the stolen purchases.
On top of that, many credit cards offer protection against companies that undercharge you. While you may not be concerned about Target or Walmart fraudulently charging your card, it's a nice perk when buying from smaller, unknown vendors on Etsy or eBay.
Additional Insurance
Many cards offer auto and travel insurance benefits.
Car insurance is usually for rentals, which will save you the extra fee they always try to collect before you leave the rental lot.
Travel insurance comes in a few different forms, but most commonly it offers you protection against canceled flights, lost bags, and other trip interruptions. Be sure to read the terms and fine print carefully (I know, boring, but important) as they vary by card and credit card company.
Returns and Guarantees
Credit cards want you to spend money without thinking twice. This is because vendors pay them every time you make a purchase. The more you spend, the better it is for them.
So to help put your mind at ease when making purchases, credit cards often provide chargeback protection, purchase protection, and additional warranties. While this shouldn't be the main reason for you to make a purchase that doesn't fit your budget, it's a nice free perk!
6. General protection and security
Along the same lines as the last advantage, credit cards offer more security than simply carrying cash. This can be annoying and even dangerous if you are traveling and attract unwanted attention when pulling out wads of bills.
Plus, if you lose your credit card or it's stolen, you can easily cancel it. If you're carrying cash and lose it, it's gone forever.
7. Shop easily online
Can you imagine buying online without a credit card?
Neither do I.
I guess a debit card might work, but then you lose the biggest perks of credit cards: cash back and rewards.
The bottom line is that credit cards facilitate online purchases and even secure phone reservations (such as for hotels and rental cars) that may require "leaving a card." Without them, it is much more difficult, if not impossible.
8. Delay your payment
Time is money.
Have you ever wondered what that really means?
Well, in this case, it means not having to pay until the end of the month, saving you money.
You save because of a fun calculation called the future value of money. At least it's fun for me!
The calculation of the future value of money shows what 1 dollar today would be worth in the future. Your money today will generally be worth more if you can save or invest the money and earn some kind of return (via interest, dividends, capital gains, etc.).
Here's a quick example to bring this point to life, with the following assumptions:
Let's say you spend $2,000 in monthly expenses.
The stock market returns 6% per year.
Without a credit card, you would be forced to use cash or a debit card to cover $2,000 of expenses throughout the month. You couldn't invest your money and get the returns from the stock market (second bullet point above) because you need to have it on hand in a checking account to cover expenses as they arise.
With a credit card, you could invest your $2,000 on the first of the month instead of using it to cover your expenses in the month like in the first scenario. With the 6% annual return of the stock market, it would grow to be worth $2,010 at the end of the month when you go to cash it out!
By using a credit card and deferring payment until the end of the month, you can invest your $2,000 at the beginning of the month. Then the stock market goes to work creating more money for you over time. Time really is money!
9. Easier to budget
Credit cards work great for budgeting because they track your spending (sometimes even by category), making it easy to set and track a budget.
This is especially useful when paired with a budgeting app or platform.
10. Comfort
Last but not least in the list of credit card professionals, they are convenient and make life easier.
They allow you to easily spend money online and in stores, with almost all merchants and vendors willing to accept credit cards these days. You don't have to carry cash, or worse, coins (gasp!).
Paying with credit cards has never been easier, as you can usually quickly and easily transfer money directly from your bank account in a matter of minutes.
I can't say enough: credit cards are a great tool for consumers.
Ready to open your next personal credit card? See, compare and apply for the best credit cards out there.
Disadvantages of credit cards
Credit cards have many advantages, but it's not a one-sided story. Of course, there are also some disadvantages of credit cards.
Mainly, they are things that you can avoid. But of course, to avoid them, you have to be aware of them.
