Credit cards have a bad reputation, but is that rep justified? Are credit cards bad or can they be a good thing? Let’s break down some facts.
What is a credit card?
A credit card is a payment card that is issued to a person from a card issuer. The cardholder can pay for items and services with the issuer’s money with the promise of paying the card issuer back. This agreement comes with a variety of terms and conditions.
The reason why some people ask, “are credit cards bad?”
There are three main reasons that you might hear other people warning you not to use credit cards. Those reasons are interest rates, impulsive spending, and the consequences if you do not pay back the money you borrow.
Interest
First, credit card issuers make their money by charging the cardholder interest. They only charge interest on the balances that remain on the card after the end of the billing period.
The interest rate is usually high compared to conventional loan rates but varies depending on the issuer and cardholder’s credit score. If you pay back the money you borrowed every billing period, you will not be charged interest.
I believe this is the largest negativity that surrounds credit cards and the reason why people believe that using credit cards is bad. If you don’t pay the balance off in full, you’ll be losing money due to interest.
However, this is an agreement between the cardholder and the issuer. It’s not a secret. If you borrow money and don’t pay it back within the billing cycle, you pay them extra money. This is common with taking out any type of loan.
How do you avoid interest? Pay the balances off every month and set up autopay.
Impulsive spending
Studies have shown that people are more likely to overspend with a credit card than they would have if they chose to pay in cash. That’s because watching physical cash leave your hands is a lot more painful than simply swiping a piece of plastic.
Therefore, people tend to spend less using cash.
Inability to pay
Lastly, what happens when you don’t pay back the card issuer that you borrowed from?
If you do not make at least the minimum payment on your credit cards, the issuer will report your late or non-payment to the credit bureau.
If you are reported for late and/or non-payments, your credit score will decrease. When you have a low credit score, you may be turned down for credit in the future. This could also cause you to pay a higher interest rate on new loans and cards.
Interest rates, impulsive spending, and not paying off the credit card in full every month can lead people into a deep hole of consumer debt that is extremely hard to get out of.
The positives of using credit cards
Now that we discussed the negatives, I’d like to point out some positives.
If you learn how to master these benefits, you will no longer be a credit card victim like everyone else. Instead, your credit cards will become a tool in your financial independence toolbox.
Credit card benefits
If you do not carry credit card debt, you may want to seriously start utilizing the incredible benefits that they offer.
I’m going to list out some of my favorite credit card benefits, but this is not at all a complete list.
Convenience
Carrying cash around is just not convenient. It’s hard to know exactly how much cash you need on hand. It’s especially frustrating when you go grocery shopping and underestimate the cost of your grocery bill.
Additionally, cash is bulky. And who wants to count out coins anymore?
Cleanliness
Now, most people aren’t really concerned about the cleanliness of money, but I am a slight germaphobe and it has to be said. Physical cash is extremely dirty.
During my days as a cashier, there were days that my hands would change colors by the end of my shift because of the filth on people’s money.
Handling people’s cash was disgusting. I’m not joking when I say I had cash in my hands that were pulled out of women’s breasts and sweaty shoes.
Just because you never kept money in your sock doesn’t mean that the person who had that cash before you didn’t.
Extended warranties
Do you recall the last time you bought an electronic, a piece of furniture, vacuum, etc., and were asked if you would like to purchase an extended warranty? Those extended warranties can be pretty expensive.
If you purchase your item using your credit card, you may automatically get an extended warranty free of charge.
For example, I have a credit card that offers an additional 1 year extended warranty on top of any manufacturer’s warranty if I use my card to purchase the item.
Cashback
A lot of credit cards allow you to earn cash-back on purchases. It’s not hard to find a credit card that offers 2% cashback. However, some cards offer even more cashback in certain categories.
When we first started learning about credit cards, we applied for the Citi Double Cash Card. That card gave us a 1% cashback when we made a purchase and 1% when we paid the bill.
In addition, we also have a card that gives 5% cashback at restaurants and retail stores, and 1% on other categories.
Travel
Some cards give you free hotel stays and let you earn travel miles and points instead of direct cashback.
These are our favorite types of cards because when you redeem points for travel, you can get a better value than cashback cards.
We started taking out cards with travel benefits last year and were planning a trip to Rome for this year. We saved up enough points to travel anywhere in the world for free. It’s a little secret that not many people know about.
Unfortunately, at the time of writing this, we are on quarantine because of the Coronavirus. Needless to say, we have elected not to travel this year.
While not traveling is disappointing, the good news is that all those free travel miles we earned can also be redeemed for cash or merchandise.
Last week, we cashed out all of our travel points for a direct deposit of over $3,000. We decided that the money would be better invested right now instead of sitting idle waiting for travel.
We will save up more points for travel next year!
The flexibility of the rewards on travel cards is a lifesaver in situations that you don’t plan for.
Insurance
Another common benefit that comes with credit cards is insurance coverage.
Most credit cards offer a variety of insurance coverages such as car rental, cell-phone, and trip cancelation insurance.
To take advantage of this benefit, just charge the item or rental to the credit card that offers the insurance.
Sign-up bonuses
Lastly, I’d like to introduce you to sign-up bonuses. Credit card sign-up bonuses are like fireworks to The Financial Independence Community.
Some card issuers offer cardholders bonus points if they apply for their cards and meet a minimum expenditure.
For example, At the time of writing this, the Chase Sapphire Preferred was offering 60,000 bonus points after you spend $4,000 on purchases in the first 3 months of opening the account.
That’s about $750 toward travel or $600 cashback.
If you want to take advantage of credit card sign-up bonuses and use this method of what’s called “Travel Hacking” you’ll want to make sure that you aren’t overspending to reach the spend requirements.
You can read 11 Practical Ways to Meet Credit Card Minimum Spend to see how you can reach these limits without overspending.
Are credit cards bad?
Now that we’ve discussed the positives and negatives surrounding credit cards, you can now determine whether or not credit cards are “bad.” The answer is simple, it depends.
You aren’t supposed to use credit cards as a form of emergency payment.
If you don’t have the funds available to pay off your credit card every billing cycle, you should not be using credit cards. If you do, you will only be on the losing end of the deal. In that case, yes, credit cards are bad and you should not use them.
However, if you are fiscally responsible and use credit cards as a tool instead of a loan, they are great assets to have. Credit cards can help you save money, earn money, and allow you to travel the world for FREE.
Do you take advantage of credit card benefits?
