What do you think of when you think of credit cards? Do you think of cash back rewards and redeemed airline miles or are you plagued with thoughts of insurmountable debt…or somewhere in between?
Love them or hate them, credit cards are a part of the norm in America. Cardratings.com reports an estimate of 640 million credit cards in circulation in the United States with the average American holding 4.
Popular arguments for credit cards:
It is easier to carry and swipe plastic than deal with paper bills and change.
However, a debit card is the same size as a credit card and affords the same convenience.
Credit cards offer better protection if they are lost or stolen.
Debit cards offer protection as well, but the amount of protection is highly dependent on when you report the card missing. Also, many debit cards can be used as credit cards, when that is done, you are afforded the same protection as the credit card counterpart.
Does my Visa Debit card have security protections? Yes, when you sign for your purchases…
MasterCard.com also offers a Zero Liability policy for signed purchases
Redeemable Points & Rewards
If you have excellent credit, you may be eligible for a credit card that offers cash back, rewards, redeemable airline mileage or some other incentive. It’s been argued that the rewards entice people to spend more. However, if someone is disciplined enough to gain & maintain the credit worthiness to be eligible for a rewards card, they are probably disciplined enough to use it responsively. Also, some of these cards carry annual fees, the highest I’ve seen was the Visa Black Card with a hefty $495 annual fee! Read the fine print! If you decide to chase the rewards, do a cost benefit analysis and make sure it will truly benefit you.
With the new Credit CARD laws, rewards may dry up as credit card institutions will be looking for new ways to maintain a profit. Also, while rare, debit card reward programs do exist. However, their rewards are generally smaller than those offered by credit card companies.
Credit Cards are Necessary to Improve Credit Score or Establish Credit
While it’s true that paying your bill on time, over time will increase your score it is not the only factor. Your credit score is also factors in
- How many open accounts you have (so too many credit cards can hurt you)
- Your debt to income ratio (too much debt owed negatively impacts your score)
- Credit utilization percent (a good rule of thumb is not to use over 50% of your credit balance)
- Duration account has been opened (the older the better…so opening a new account is not going help your score)
- and more!
Some feel it is necessary to use a credit card to establish credit so they have credit history for bigger loans in the future. While responsible use of a credit card can factor into a strong credit report, lenders have alternatives for determining if someone is a candidate for a loan. Lenders can look at payment history on installment loans (cars, student loans), rent and even utility bills.
Bottom line: Responsible credit card use can be used to establish a strong credit history, but it is not the only solution.
Security for emergencies
I cringe at this argument! Credit cards are NOT security. You are at the mercy of a financial institution that can close your account or lower your limit. The best security for emergencies is an emergency fund, not a credit card!
Interest-free short term loan (assuming the bill is paid in full each month)
If you pay the balance in full each month, you don’t have to worry about interest. However, you have to be careful not to overspend.
Popular arguments against credit cards:
Credit Cards create the debt problem
Let’s get one thing clear – credit cards do not create debt…people create debt. That being said, the credit card industry makes it difficult to recover from debt with steep penalties and high interest rates. Will the Credit CARD act remedy the problem? Only time will tell.
Tendency to Spend More
Credit cards fulfill our need for instant vs. delayed gratification. Instead of saving for a purchase and taking the time to evaluate rather it is something we really want (or need)…credit cards enable us to live in the moment and make an immediate purchase before reflecting on rather it’s what we really want.
Personal finance guru Dave Ramsey takes a strong against credit cards:
When you play with a multi-billion dollar industry and you think you’re going to win at their game, you are naive. You cannot beat the credit card companies.
While it may seem there are more arguments for credit cards than against them. The debt problems carries a lot of weight. So where am I? I’m at a fork in the road looking at signs pointing to Camp Rewards and Camp Avoid. I’m thinking of forging a 3rd path, and that is Camp Minimal Use. I am not persuaded by rewards programs but I’m not ready to shred my last card either. I travel enough to appreciate the benefit of using a credit card when renting a car or checking into a hotel over debit. My frequency of travel is enough to keep my credit account active but not enough to rack up any real frequent flier miles. I don’t carry the card with me, so for everyday purchases I am limited to what I can afford from my bank account. It works for me!
What about you? How do you feel about credit cards? Love them, hate them, or indifferent?