Credit cards are one of the financial topics that people cannot seem to agree on. On one side there’s people who cannot stop raving about all the credit card points and free hotel stays they get — and on the other hand you have the Dave Ramsey’s of the world saying that credit cards are bad and should be avoided at all costs…How do you know if you should or shouldn’t use a credit card?
Let’s start by looking at the good and the bad of credit cards.
Credit cards offer a level of protection that cash and debit cards do not. If someone were to get your debit card info, they could spend and use money straight from your account. This money is lost until the situation is resolved which could take weeks. Plus, there are weird rules around when you have to report to have certain limits covered. With a credit card, they are not stealing your money directly like they do with a debit card.
Credit cards give cash back, rewards, miles, etc. that can be used to benefit you in your life. If you are going to spend the money, you might as well put it on a credit card that gives rewards back to you for your spending. The key here is to not buy things just for rewards. That will never end up being the most beneficial route.
Credit cards make it very easy to track spending. You can link your cards to an app like mint or everydollar so that you can see where all your money is going. If you use cash you have to keep track on your own.
When used correctly, credit cards can help you build your credit. This is extremely important for you down the line as you try to get a mortgage, car payment, etc. The better your credit, the lower interest rate you will receive which can make a massive difference over a 30 year mortgage. Work on building your credit as early as you can.
Credit cards usually have an interest rate somewhere between 20-30%. This is extremely high which makes it very hard to get out of debt after you get sucked in. Think about it, if you bought something worth $10,000 on a credit card at 25% interest, then you are paying $2,500 a year in interest before you even touch the balance. Make sure to only buy what you can pay off that month. Additionally, this is why emergency funds are so key. You never want to be in a situation where an unexpected expense comes up and your only option is to swipe a credit card that you cannot pay off that month.
For many people, credit cards do not feel like real money which makes it easier to overspend and think about it later. With cash, you feel the money leave your hands which creates a different emotional response.
Many people see the minimum payment on a credit card and think that they just need to pay that. This is not true! If you continue to just pay the minimums, you will be a credit card company’s best friend. Pay off the whole balance as quickly as you can.
At the end of the day, I think credit cards are a great tool when used correctly — but in order to determine if a credit card is right for you, you need to get honest with yourself and look at your habits. If you know that a credit card would cause you to overspend and go into debt, then you probably should not use them. No amount of points or cash back would be worth that, but if you are responsible with credit cards, they can be extremely beneficial while also providing extra safety.
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Disclaimer: Nothing on this blog should be considered advice, or recommendations. If you have questions pertaining to your individual situation you should consult your financial advisor. For all of the disclaimers, please see my disclaimers page.
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