Are credit cards good or bad?
You can find very different answers to that question among financial gurus.
Some like Dave Ramsey warn you to stay away from credit cards entirely. He believes it’s too easy to rack up debt, or at least to not realize how much you’re spending, when you use a credit card. He tells folks to stop “worshipping at the altar of FICO” and pay for everything in cash. (See Dave Ramsey's article Do I Need to Keep a Credit Card?)
On the other hand, pragmatists like Clark Howard espouse the great benefits of credit cards. For those who aren’t prone to running up excessive debt, using a credit card to make the same purchases you would make by cash or check has some big benefits. (See Clark Howard's article Here's My Philosophy on Credit Cards)
In our view, Dave Ramsey’s stance is not practical. We live in the real world where credit scores matter. Having a good credit score can make your life easier when applying for a home loan, buying insurance, and even applying for jobs. And there are times when using a credit card instead of cash or debit just makes sense.
Benefits of Credit Cards
Many people think debit cards offer the same payment protection as credit cards. But when you pay with your debit card, the money is instantly transferred out of your checking account. In the event of fraud, the burden is on you to work with your banking institution until, hopefully, they return your lost funds.
If you had paid with a credit card, the burden would be on the credit card company and the disputed charge would be removed from your statement before you paid a cent. Because credit card companies must eat the costs of these fraudulent charges, they continue to improve their technology to detect and prevent fraud as soon as possible. This is particularly beneficial in the world of ecommerce where card numbers are transmitted digitally on a regular basis. Credit card holders can rest assured that their finances are safe in the event their number is intercepted.
Payment protection extends beyond fraud. During the recession, appliance and furniture stores were going out of business before their customers received their deliveries. Those who paid with cash were totally out of luck, but those who had paid with a credit card could dispute the charges. (See Credit Card is the Best Way to Purchase Furniture and Appliances)
As weird as it sounds, in our financial system, you need credit in order to prove that you don’t need it. How long you’ve had an open line of credit matters greatly to your score. Opening a credit card when you’re 18 and keeping a low balance can help you build credit for the day you want to apply for a car loan or mortgage.
If you rent instead of owning a home and pay for your cars with cash to stay debt free, a credit card could be the only line of credit you have. Having this single line of credit open and in good standing makes a big difference over having no credit at all. It’s another benefit you won’t get just from using your bank’s debit card.
The best credit cards are those with cash rewards. Depending on your program, you could be earning between 1% and 5% cash back on your everyday expenses, like groceries, gas, and bills. For things you’re going to pay for anyways, why not get a little bit of that money back from your credit card?
Many are wooed by cards that offer air miles or hotel points, but these cards often include high annual fees and many never accrue enough points to see any rewards. Cash rewards, on the other hand, can be instantly applied to your bill and keep real cash in your pocket.
Other Cool Benefits
Different companies offer a variety of other benefits to their cardholders. Depending on your program, these benefits might include:
- Travel insurance
- Rental car insurance
- Roadside assistance
- Lost luggage reimbursement
- Extended warranties
- Price protection
- Credit score reports
- Cash back at checkout
- Discounts at online retailers
To be fair to Dave Ramsey, many who call into his radio show are struggling with credit card debt. It’s easy to get into trouble with credit cards, and it’s unwise to use a line of credit as an extra source of income. You should check with your financial advisor to make sure credit cards are a smart choice for your particular situation.
But for many of our readers who simply need to pay the bills and other daily life expenses, credit cards are a great way to enjoy a variety of useful benefits and services.