Credit Cards – Why You Should Use Them and How

If you think that credit cards are bad or should be used when you need to borrow money, you have probably not been properly educated on the uses and benefits of a credit card.

You should be using a credit card for every purchase you possibly can!

Misconceptions About Credit Cards

Lets start by covering some common misconceptions around credit cards.

Using my debit card as a credit card is the same as using a credit card

NO. Using your debit card as a credit card is just as bad as using cash or debit. You receive almost none of the benefits of a credit card or any cash back when using your debit card as a credit card.

You have to pay interest on credit card purchases

In short, NO. Each month you get a statement with your all the unpaid charges from the previous month. You must pay the amount listed on the current statement before the due date or you will incur interest on any unpaid portion. If you are not paying your statement balance in full every month you are using your credit cards inefficiently.

Credit cards are for borrowing money and financing purchases

In short, NO. You don’t use a credit card because you need money or to finance a large purchase except under extreme or special circumstances (emergencies and no interest offers). Credit cards have a high interest rate if you don’t pay your balance in full each month.

Credit cards don’t boost your credit very much

In short, NO. Credit cards are extremely important for your credit score and history. Mortgages and installments are eventually paid off, closed and removed from your credit report.  Credit cards can last forever and count towards your available credit.

I am financially sound and have no need for credit or credit cards

You are the best candidate for a credit card. You can enjoy all the benefits credit cards have to offer and are in perfect shape to start using them today. You can also start building your credit for the future in case you change your mind on buying that house.

When Not to use Credit Cards

Before I tell you why to use a credit card, make sure you know when not to use a credit card. As mentioned above, credit cards are not for financing purchases or spending money you do not have. Also if you are not a responsible individual, credit may not be for you, yet (don’t ruin it for future you, bad remarks lasts 7 years).

If you are already behind on bills and missing payments you should not be using a credit card. The late payments and interest charges will not outweigh the benefits. If you are in need of additional funds a personal loan will almost always give a better interest rate.

When to use Credit Cards

If you do not fall into the above category, then you should be using a credit card for every purchase possible. There are a few exceptions however:

What can you not pay with a credit card?

Other lines of credit such as credit cards, loans, mortgages, etc. Also cash only operations; however, these are becoming less and less frequent with digital coverage and devices expanding including the supporting services.

What if there is a fee for using a credit card?

That depends on the transaction amount, cash back rate, and total fee. Example, if you have the option to pay your $1,000 rent for a flat $5 fee on an unlimited 1.5% cash back card; you would get $15 cash back minus the $5 fee for a profit of $10 dollars. Even when the fee is more than the cash back it may be worth the convenience of using your credit card or be worth the benefits provided by your credit card to pay a little more.

How to use Credit Cards

You insert the side with the side with the chip… Just kidding. But seriously, make sure you know how to use your credit card with out paying interest or fees otherwise it will cost you money and hurt your credit.

Pay your statement in full every month

Every month you get a statement which has two numbers. The full statement amount and minimum payment due. Before the due date you must make payments totaling the amount on the statement or else you will be charged interest on the difference.

Pay at least the minimum every month

You must pay the minimum amount due every month to avoid late fees, additional interest and a bad mark on your credit report.

I strongly recommend setting up automatic payments for at least the minimum payment amount. This way if you forget or become physically unable to pay you at least avoid a bad mark on you credit with the smallest impact on your bank account.

Benefits of Using Credit Cards

Now for the good stuff.

Security

Using your credit card provides a 100% safeguard against fraud in ways using your debit card or debit card as credit does not. If your credit card is compromised for $5,000 you will get a notification or bill in the mail for the that amount, dispute the charge, and eventually the charge will be removed. However, if you made the same transaction with your debit card, the $5,000 would be deducted from your available balance in your checking account and you would be with out the $5,000 until the fraud investigation is complete and the account has been credited.

Additionally most credit cards provide a guarantee of the purchase as part of their benefits which allows them to place a chargeback against the illegitimate merchant should it be deemed appropriate.

Cash Back

If you weren’t sold on the security benefits (I was) then you should be sold on the cash back, literally. As you probably know, credit companies charge merchants a percentage of the sale to use your credit card. To entice consumers to use their credit card more, they share a percentage of that transaction fee back with you.

Currently you can get up to an unlimited 2.5% cash back on every transaction with a $59 annual fee and up to 2% cash back with no annual fee. For more information about cash back credit cards read this article:

https://shane.pw/2018/04/21/cash-back-credit-cards-2018/

Keep in mind you can use your credit card for almost everything including your bills such as electricity, insurance, cell phone, internet, etc.

Additional Benefits

This part is not so straight forward as all cards come with different benefits, but, most have the same basic benefits. Some standard benefits provided by most credit cards include:

  • Rental Car Protection
  • Fraud Protection
  • Mobile Phone Protection
  • Road Side Assistance
  • Other Travel and Emergency Services

For a full list of standard Visa benefits see:

https://usa.visa.com/support/consumer/card-benefits.html

For a comprehensive guide on credit card benefits see:

https://www.creditcardinsider.com/learn/guide-credit-card-benefits/

How to get a Credit Card

So your ready to get a credit card. Don’t start applying before you know which credit card you want, and if you will be approved or not.

First, If you have not already, you should look at your credit and make sure its in good shape. Check out this article for information on how to monitor your credit:

https://shane.pw/2018/04/27/credit-score-information-monitoring-and-its-importance/

Second, unless your credit is immaculate you may want to see if you per-qualify before applying. This will give you a soft yes or no with out effecting your credit score. This can be done at any time with no effect:

https://www.nerdwallet.com/prequalify/credit-cards

What to Look for in a Credit Card

There are so many cards, benefits, fees, etc. Which ones are the most important to look for?

Cash Back

Obviously the more cash back the better; however, the cards with the best benefits and cash back rates usually have an annual fee. So make sure you will use them enough to outweigh the annual fee. See this article for more information:

https://shane.pw/2018/04/21/cash-back-credit-cards-2018/

Foreign Transaction Fee

If you plan to travel outside the country make sure your card has a 0% foreign transaction fee. This will allow you to use your card abroad at the current transaction rate for your currency at no additional fee. Additionally, you usually get to enjoy the cash back from these purchases as well.

Annual Fee

If this is your first credit card, make sure it has no annual fee. You should keep your first credit card forever. This will serve as the oldest account on your credit report. Never close this card (or any cards with no annual fee unless you have a very good reason). If your card does have an annual fee, make sure the benefits are outweighing the fees; otherwise, it might be worth closing that card.

Card Type

Not all credit cards are accepted everywhere. The most accepted card is Visa followed very closely by MasterCard. Next in line is Discover followed by American Express. Credit card acceptance is becoming less and less of an issue as time goes by; however, if you only have 1 card, I recommend a Visa or at minimum a MasterCard.

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