Yesterday we went over the rules for using credit cards wisely. You need to follow the rules because using a credit card is dangerous if you don’t know what you’re doing. So be sure to read that post first.
But today we’re talking about the benefits of credit cards.
And the benefits are so staggering that if you can use credit cards wisely, they should be your primary method of payment.
Here are a few of the benefits of paying with a credit card.
Miles, Points, and Cash Back
This is by far the biggest reasons to use credit cards.
When you pay with cash, every dollar you spend is gone forever. Ditto for debit cards. But with credit cards, a small percentage of every transaction comes back to you.
It is generally in the form of “miles” or “points,” but both of these currencies can be converted into cash.
How much cashback can you earn? Well, it depends. But let’s look at the floor. A card like the Chase Freedom Unlimited will give you 1.5 points for every dollar spent and each point is worth one cent of cash back. This means that if you normally spend $30,000 a year you’ll get $450 in cash back.
That’s assuming no sign up bonus, and you’ll often get a sign up bonus.
It’s also without using multiple cards and always using the one that gives you the most points.
It’s just a free $450 that you wouldn’t have if you didn’t use a credit card.
Of course, if you do sign up for multiple credit cards and land multiple sign up bonuses, the uses of miles and points start to become pretty cool.
I’m still a relative beginner at this stuff, but I successfully bought Disney passes for my entire family, paid for entirely with credit card points.
Right now I’m planning a trip to Hawaii and it looks like we can cover 2/3 of the cost with credit card points.
And this is just scratching the surface. The real pros travel the world in first class using miles and points.
Unparalleled Security and Protection
Ironically, many people are scared of paying with credit cards. They worry about their information being stolen and consider credit cards unsafe.
Of course, your information can be stolen just as easily with a debit card as with a credit card.
Let’s imagine the worst case scenario: Someone gets a hold of your number and goes on a spending spree.
With a debit card, this money comes straight out of your bank account. But with a credit card, the credit card company pays for all the fraudulent purchases. Your money isn’t touched.
Yes, your balance will go up if someone is making purchases with your card. But when you report your card stolen, this can be remedied very quickly. With a debit card, it could take weeks for them to get you your money back. Yes, you’ll probably get it back eventually, but timing matters. Your bills need to be paid and you need money in the bank to pay them.
Of course, the fact that you’re spending someone else’s money is only safe if you spend responsibly, because you have to pay it back. And if you can’t pay back everything you spent this month at the time the bill comes due, you’ll need to pay interest.
But again, we’re going to assume that you read yesterday’s post and are using your card wisely. If you are, it’s about the safest way to pay.
A Second Layer of Protection for Purchases
Not do credit cards provide protection against fraud and theft, they also provide protection against purchases gone wrong.
Ordered something that never arrived? Or maybe something that arrived damaged? Hopefully the company that sold it to you will make it right, but if not, the credit card company will.
I’ve used this benefit a few times on smaller purchases, but I almost used it again recently. I bought some phones off of Amazon for my wife and myself. Everything was fine for a few weeks, then my wife’s phone suddenly stopped working.
Amazon wanted the manufacturer (Google) to take care of the problem. Google wanted Amazon to take care of it. My wife spent far too many stressful hours dealing with deliberately unhelpful customer service people. At one point, Amazon said they’d issue a refund, but only a partial one.
Eventually, we got a replacement phone. But in hindsight, it’s incredibly obvious what I should have done: I should have called the credit card company. The phone I bought doesn’t work. The seller won’t issue a full refund even though it’s under warranty. I want to dispute this transaction. The credit card company could have resolved the issue quickly and efficiently.
One way of thinking about a credit card company is that it’s a powerful team that’s on your side when it comes to dealing with big corporations.
This is a cool feature that some (but not all) cards have. You do have to be proactive about it, but it’s a great feature for the penny pinchers out there.
The idea is that if you buy something and then find a lower advertised price within a certain time frame, you can file a claim for a partial refund (the difference between what you paid and what it’s currently selling for).
Many cards offer warranty extensions. The time period varies, but it’s usually something like one year of additional protection on top of the manufacture’s warranty.
This is really nice because it let’s you confidently turn down all those sales pitches for extended warranties when you buy something. Those are always stressful encounters because they force you to imagine your expensive purchase breaking. But don’t worry, if it breaks just after the warranty expires, you credit card likely has you covered.
You Often Don’t Need to Put Down Deposits
I used to work at Enterprise Rent-A-Car. If you wanted to rent a car and were paying with a debit card, we had to charge you for the rental and a large security deposit up front. You would eventually get that security deposit back (in most cases) but it would depend on how quickly your bank processed the refund.
If you were paying with a credit card however, we would just take your card information and maybe put a soft hold against the credit limit of the card to make sure you have funds available. We wouldn’t charge the card until you returned the car. And of course, it’s the credit card company who is paying at that point, not you. You pay the credit card company back later.
Speaking of car rentals, you know how they want to sell you additional insurance? Well, the nice thing is that many credit cards automatically carry additional insurance for collision damage.
There are other forms or secondary insurance that the car rental companies offer that the credit cards don’t (like personal injury protection), but usually when you rent a car you’re worried about damage to the car itself.
One of the most humbling aspects of my personal finance journey came when I was doing my first ever Quick Wins Project. I realized that I had roadside assistance through my credit card, but I was paying for roadside assistance both through my car insurance and a AAA membership*
* Yes, I wrote “a AAA” not “an AAA” in anticipation of you reading it “a triple-A membership”).
I have a debit card, but I never use it. Every now and then I end up paying cash for some reason or another. But my preference is overwhelming: I want to pay for everything I buy with a credit card.
If you use your card wisely, it’s clearly the best way to go. The fact that I was able to get free Disney passes for my family is enough to justify a lifetime of swiping one form of plastic card over another.
If you’re credit is okay, I think starting with the Chase Freedom Unlimited is a great option. It has no annual fee, usually comes with a sign up bonus, and gives you 1.5% cash back on every purchase. I don’t get paid to advertise it (yet), I recommend it because I use it and love it.
If you have poor credit, you might need Google some options for people who need to rebuild their credit. Whatever you do, make sure to use your card wisely. I know I’ve linked to that post about five times, but all the benefits of credit cards are erased in an instant if you fall into the debt trap.
Be responsible, but enjoy the benefits of using credit cards.