Benefits of using a credit card
Over 80 percent of U.S. households have at least one credit card. The reason is clear: Credit cards offer enormous advantages over other methods of payment. Although the danger of overspending with a credit card and running up major interest charges exists, those cardholders who use their credit card wisely can experience major benefits. That goes for even those credit cards that do not offer cash back, frequent flier miles, or other rewards programs.
One of the most obvious strengths of credit cards is their convenience. Having a major Visa, MasterCard, Discover Card or American Express credit card in your wallet means no more running to the bank for cash, counting out change, or hurriedly scribbling in a check book when you need to make a purchase. Credit cards even offer benefits over debit cards, the other piece of plastic many of us carry. While debit cards look like credit cards, they lack some of the benefits of being able to charge. Debit cards, many of which are linked to your checking account, sometimes have 24-hour charging limits, which could prevent you from buying that $900 computer you've had your eye on. Debit cards can even act like credit cards if you sign for a purchase instead of using your PIN number, with the bank usually covering the difference between the amount in your account and the cost of your purchase. However, when the bank acts essentially as a creditor in this manner, you can get slammed with sizable insufficient fund fees for covering your shortcomings. Alternatives to debit cards linked to checking accounts are called prepaid debit cards, which are preloaded with funds and are designed to avoid the pitfalls of spending more than you have.
Your credit card can help you budget expenses each month, provided you pay your bill in full every time. If you do, your bill then acts as a master receipt that displays an itemized listing of what you spent your money on. Some credit cards, especially those from American Express, even categorize your purchases and send quarterly or annual summaries of your spending that provide percentage breakdowns of how much you spent on retail, dining, entertainment, etc. For those of you that have set up an online account with the credit card company, you can likely import the data into some form of personal finance tracking software.
The use of a credit card is directly connected to your credit score, the report card for borrowers. The responsible way you handle your credit card is recorded in your credit history for lenders to review. Your high score in that credit report shows how creditworthy you are deemed by other lenders and that you pay your bills on time and spend conservatively. Conversely, irresponsible use of a credit card will produce low credit scores which can result in either being denied for future credit or paying much higher interest rates.
While you usually get hit with charges for not paying your entire bill each month, sometimes the lender will give you a break in the form of the float. The float offered by most credit cards is the grace period you have to avoid interest on a purchase if there is no balance on your card at the time of purchase. That means you get a break from 20 to 30 days during which your lender will not charge interest on your purchase. The float is a great way to avoid paying interest on unexpected expenses or on items that you eventually decide to return.
You can sometimes get the lender to ease the pain associated with things like the annual percentage rate and annual fees. Credit card companies are often open to negotiation, on anything from waiving the annual fee to lowering your APR to excusing a late payment. You just need to ask. To attract a new customer it costs a lender between $50 and $150 for each account. Due to the competition in the industry, it makes sense for your credit card company to do what it can to keep you from leaving them for a competitor.
Credit card companies are major corporations with all the strength that entails. So when you use your credit card, you get to apply that strength in your own favor. Making a costly purchase with plastic gives you immediate purchase protection that you do not get when you pay with cash or some ATM cards. When used for purchases, some credit cards automatically extend your product warranty. If merchants don't deliver what you paid for, the credit card issuer can step in to help. The money you are using to pay for a credit card purchase comes from the issuer, after all.
Finally, making a purchase with your credit card gives you a degree of theft protection. While everyone hopes it will never happen, be sure to let your credit card issuer know if your card is stolen. Most credit card companies will work very hard to resolve theft issues, as fraud is one of the industry's biggest concerns. Generally you will only be responsible for paying back the first $50 of the thief's total spending, which could save you a lot of cash if the crook has expensive tastes. (You may not even have to pay that amount if you ask nicely.) And, if you report the theft immediately, most credit cards offer a zero liability policy, meaning you don't have to pay anything for unauthorized purchases made with your card. Meanwhile, if you have an online account, you will be able to notice fraudulent activity with your card before the next statement arrives in the mail.
To comment on this story, write Editors@CreditCards.com.
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Published: June 1, 2006
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