October 24, 2016

Why Using a Credit Card is a Sensible Financial Decision

Article by: Melissa Taylor

With more than 500 million credit cards in circulation in the United States, Americans are no strangers to our beloved plastic. Experts in personal finance spend a lot of effort trying to convince people why we should never lay a finger on a credit card. With nearly sixty percent of Americans carrying a regular balance on their credit card, the personal finance experts have good reason for saying so. But for the more than forty percent of Americans that do pay their balances in full each month, it may come as a surprise that paying with credit rather than debit can actually be a profitable venture.

Establishing the Ground Rules

In order for using credit cards to be a profitable venture, there are a couple of ground rules that must be established first. The benefits of using a credit card can only be maximized as long as the user is not carrying a balance. If a balance is carried, whatever benefit may have been earned is undermined by unnecessary interest payments. Secondly, it is important to ensure that your credit card does not charge an annual fee or at the very least, the costs are minimal. It’s quite common for rewards credit cards to charge an annual fee. But the reality is that in many instances, the user ends up paying for their own perks. As an example, if the perk of a credit card is one percent cash back and the user charges $5,000 on the card in one year, the user will earn fifty dollars back as a perk. However, if the annual fee for the credit card is $50, there is no benefit and no perks. Therefore, it is essential that you do the math to ensure that the annual fee is worth it.

If you can handle those ground rules with ease, then you are ready to make the switch from cash to a rewards credit card. Rewards cards come with a variety of benefits from cash back to points and airline miles. By using your card to pay for expenses that you would traditionally pay for with cash or a debit card, you are actually earning money in interest. As long as you never pay interest on your card by paying on time, you end up getting paid by your credit card company in the form of points, cash back, or air miles. Those are benefits that you don’t earn paying with cash. If you have traditionally been a cash-only consumer, consider cashing in on the many rewards available in order to earn the most with your money.

For those who use their credit card wisely, rewards are just the beginning. Here are some additional tips and tricks to help you cash in from your credit cards:

Save Money on the Cost of Borrowing

Interest rates on standard bank and car loans are on the rise, but there are a number of credit cards that offer introductory low rates of interest and sometimes even zero percent interest for a short time frame. Consumers can use these special offers to reduce or eliminate the interest on college debt and home equity lines of credit, or to even consolidate debt. The key is to always read the fine print very clearly as these offers are often laced with traps including high fees on balance transfers and sky high interest rates should you make a payment even an hour late cancelling the promotional rate automatically. You should also be cautious when maxing out a credit card as this can often lower your credit score but if you play by the rules, there are many opportunities to save money by taking a lower rate from a credit card on existing debt and bank loans. You will also need to ensure that you can pay off the debt before the promotional period expires or have a low interest outlet to transfer your remaining balance.

Earning Rewards is Earning Money

There is no shortage of incentives available for credit card users. The real challenge lies in selecting the rewards card that is right for you. When possible it is best to select a no-fee card but if there is a fee associated with the card you desire, do the math to ensure that your benefits outweigh the cost of the annual fee. Once you find a suitable card and are comfortable with the fine print, use your cards for as many purchases as possible while being very careful not to overspend just for the sake of earning rewards. If you use your credit card for major expenses like tuition, rent, or home renovations, your rewards will add up fast. Just make sure that you can pay the balance off in full to avoid interest. Rewards cards can be particularly useful if you make purchases on behalf of a business. By the end of the year, you may have even earned enough air miles to cover your annual vacation.  However, be careful to never exceed your credit limit when making large purchases as this can negatively impact your credit score.

Credit Cards Protect Your Money

Purchases made using a credit card are under the protection of federal law. The Fair Credit Billing Act provides credit card users with the right to dispute charges for purchases that are not delivered, items that are not delivered as agreed upon, and items not delivered as promised by service guarantees. In addition, if you believe that your credit card was used without your authorization due to being lost or stolen or if you are the victim of a billing error, you can also dispute such suspected charges. In the United Kingdom, consumers are protected under section 75 of the Consumer Credit Act. If a consumer purchases goods costing between £100 and £30,000 on a credit card, the issuer of the card is jointly liable with the supplier in the event of a problem like non-delivery or if a company goes bankrupt. It is a protection that only a credit card user can use to ensure that they get their money back whereas cash and debit transactions do not enjoy the same protection.

Turning Interest-free Credit into Income

In the United Kingdom alone, growing competition and pressure to attract new customers has led to a number of credit card issuers offering interest free balance transfers for periods as long as twenty eight months while some cards will offer zero percent purchases for the first initial months. When First Tesco increased the interest free period on its Clubcard to twenty five months, Barclaycard retaliated with its own 26-month zero percent card. Rather than dishing out $3,000 on a new flat screen television from your bank account, it’s much better to hold that in your high yield savings account for the duration of the free financing period which will earn you more money in the long-term. As long as you monitor the payment due dates carefully, there is no reason that you shouldn’t be able to maximize the use of an interest free loan. But beware of applying for too many promotional cards. A number of online financial websites like money.co.uk caution credit card users against submitting a lot of applications for various promotional cards in a short period of time as it can make you appear desperate for credit and hurt your credit appeal.

Save Money on Routine Expenses

Credit cards often come with a number of discreet benefits like the “Collision Damage Waiver” protection. While it is not technically insurance, it does protect you in the event that your rental vehicle is damaged. More importantly, this often forgotten benefit saves you money on a routine travel expense that can often turn a $10 a day car rental into triple the cost if you are forced to purchase the protection offered by the rental car company. In order to take advantage of this benefit, it is important to ensure that you use the card that carries the coverage when you rent the vehicle. Another great way to save money is to use the rewards earned on your credit card for things that you need rather than what you want. By using points for routine purchases like groceries, clothing, home supplies, and other necessities, you are saving yourself money that would have typically added up on your monthly expenses.  The best part is that you’re paying with points that didn’t cost you anything to earn. But if you end up spending your points on luxuries, while there is indeed a benefit, there is no savings. Like with cash, you should always consider whether to save or spend.

If you are confident to manage your credit wisely avoiding any interest charges and unnecessary fees, there is no reason that you should be using your debit card for anything other than cash withdrawals. If you use your credit card responsibly, the extensive range of benefits can be far too profitable to ignore.