I recently got a new client and due to the COVID-19 lockdown we had to go through a lot of things virtually. When I have a new client, I always go through a pre-determined process that outlines specific steps and actions both the client and I need to take. One of the very first steps is to send the client a questionnaire to get some basic information about the client and get some insights into the client’s current financial situation and overall life philosophy. One of the questions in my questionnaire asks the client about his or her top five bucket list goals. Usually people list buying a house, travel to an exotic place, upgrading a car, saving for a college and some other things. But this lady mentioned that she wanted to stop using credit cards. It came as a little shocker to me. Of course, she is not alone in that attitude. I am hearing and seeing that many people, especially millennials, opt out from using credit cards in favor of debit cards. But are credit cards indeed as black as they are painted? Let’s find out.
The very first reason that comes to my mind why you should use credit cards is safety. Consumer credit cards come with zero fraud liability and it is required by law. Many business credit cards also come with zero fraud liability. What that means is that you are protected against fraud of any amount in case someone steals your credit card and makes unauthorized purchases. In other words, you won’t be held liable for those unauthorized purchases. To give you a quick example, just two weeks ago someone used my business credit card at Fedex and put an unauthorized charge of about $1,600.
I called my bank, launched the investigation, and the bank canceled this unauthorized charge immediately. They also sent me a replacement card with a new number. I didn’t have to worry about it at all. With debit cards the situation is different. If a thief used your debit card the money is missing right away. Since in many cases there is no fraud liability coverage for PIN-based debit transactions your scheduled online payments or checks may bounce due to lack of funds in the account and cause additional problems. It’s worth mentioning that some banks started to offer zero fraud liability debit cards but as you continue to read you will see that this is not a compelling reason to stop using credit cards.
Another great reason to use credit cards is to collect one-time bonuses and rewards. Almost every credit card comes with a sign-up bonus. This can be in the form of cash, points, or miles. You usually get the bonus after you spend a certain amount of money on your credit card within several months after account opening. The higher the spending limit the higher the bonus. For example, there are many credit cards that give a $500 cash bonus after you spend $3,000 on purchases in the first 3 months after account opening. Another usual form of a sign-up bonus is a certain amount of points or miles after you meet the spending requirements. Long story short, in many cases you are being paid for opening a credit card and I don’t see why not to take advantage of it.
Be Paid for Using Credit Cards
The third advantage of using credit cards over debit cards is being paid for using the credit card. Like with sign-up bonuses, with every purchase you make with your credit card you get a certain percentage of the amount spent back in the form of cash, points, or miles. A typical cash back is 1-1.5% on every purchase you make. In certain categories you may even get more, like 10%. Now stop for a minute and think about it: with every credit card purchase you make you essentially get an instant discount. I personally love discounts. How about you?
In fairness it must be said that there are also some debit cash back cards but the rewards are not as generous as with credit cards. Every year I accumulate around $2,000 in rewards in the form of cash, points, and miles. As of now, I have about $5,000 in rewards which can be spent on anything I want. Are you willing to give this away by using debit cards? I am definitely not!
Stop Paying For Someone Else’s Cash Back and Rewards
The fourth reason to use credit cards is to stop paying for someone else’s credit card rewards. Ok, now I have your attention, right? I’ll start with a simple question: Who do you think is paying for all these credit card rewards? Banks? Nope… Credit card users? Nope again… Merchants? Well, technically yes but still a no. It is those who use debit cards and cash pay for credit card rewards.
Here’ s how it works: when someone uses a credit card to buy something, the merchant is charged what’s called an interchange fee – a certain percentage of the total sale. The bank that issued the card is then collects this fee and uses it to pay the rewards back to the credit card holder. The bigger the rewards on the credit card the higher is the interchange fee that the merchant must pay to the bank.
As a result of the interchange fees, some stores have increased retail prices to compensate for the cost of accepting credit cards and passed the increase onto customers. So those customers who don’t use credit cards are literally paying for someone else’s rewards and points out of their own pocket. On top if, of course, they are also leaving points and free money on the table.
Purchase Protection & Price Protection
The next reason to use credit card I call double “P” – purchase protection and price protection. Let’s say that you bought an expensive high-tech item and it was lost, damaged, or stolen. Well that’s usually not a problem if you put the purchase on your credit card. Many credit card companies offer purchase protection for up to 120 days which basically insuring your product at no additional cost.
Price protection works in an equivalent manner but protects you from price reduction after you purchased a product. The most frustrating thing to me is to buy something and then see its price to drop shortly after the purchase. With price protection you can recoup the difference in what you spent compared to the new lower price. This gives me personally a peace of mind that a debit card does not.
Extended Warranty Coverage
The sixth reason you should be using credit cards is an extended warranty coverage, usually for up to two additional years above the manufacturer’s warranty period. I find this benefit extremely helpful when you buy an expensive electronics item.
Credit cards come with a lot of travel benefits. My favorite one is the auto rental collision damage waiver. When I travel outside the U.S. I always decline this coverage when offered by a rental car company to save a few bucks on my rental. If you rent a car in the U.S. then the auto rental collision waiver is usually secondary to your main car insurance unless you rent a car for business purposes.
A few other helpful travel benefits that are usually included with credit cards are lost luggage, baggage delay, and trip interruption due to unforeseen circumstances. Should you experience any of these events the credit card company will pay you a benefit up to a certain amount. Many cards also come with travel accident insurance and the benefits are paid regardless of whether you have life insurance or not. I haven’t seen a debit card yet that comes with these great travel benefits.
Build Your Credit
Just the fact that you were approved for a credit card is already positive for your credit score, at least in the short-term. But credit cards can help even more to build or improve your credit score. Lenders will be able to see your payment activity and credit card utilization. If you use your credit cards responsibly you can significantly increase your credit score. With debit cards there is simply no way to build or improve your credit and this can lead to higher interest rates when you apply for various loans.
Extra Money Because of Grace Period
Last but no least: there is another good reason I think you should use credit cards and it is called grace period. When you spend money on credit cards your checking account balance isn’t affected at all. Your money continues to sit in the account until the credit card balance is paid. If you have a high-yield savings account, you can temporarily transfer your money to the high-yield savings account and make some extra money.
As you can see credit cards come with a lot of benefits and rewards. With every purchase you make you are basically getting something in return for free. This includes cash, points, miles, discounts and additional services. However, remember that banks are not charitable organizations and they are patiently waiting for you to make a mistake. Their purpose is to incentivize you to spend more in the anticipation that you won’t be able to pay the balance in full. When this happens they will charge you a draconian average interest of 16%. This is how they make money and that’s why you need to be smarter and disciplined with your finances. Never spend more than you earn and never buy anything that you can’t afford without credit. Instead, pay your credit card balances on time to avoid interest, earn cash back and points, and be debt free.