By Andrew Housser
Almost every household in America has at least one credit card. Those rectangular pieces of plastic can make it too easy to overspend and rack up significant interest charges. Thanks to a "buy now, figure out how to pay for it later" attitude, the nation's total credit card debt has reached $850 billion.
Still, credit cards can be very useful. The key is to charge responsibly and not spend more than you can pay off each month. In fact, paying with credit sometimes is a smarter move than using debit. Take a look at how credit cards can benefit you.
1. Ease of use in travel. Rental car companies, hotel chains and airlines prefer credit cards because it is easier to charge damages to them than to debit cards. If these businesses do accept your debit card, they may put a hold on your checking account. This means you will not be able to access the "held" cash until they release the hold. A credit card also is very helpful when traveling overseas. Many merchants in foreign countries do not accept debit cards.
2. Higher credit rating. Paying off credit card bills on time (and hopefully in full) builds your credit score. Creditors report this payment activity to the credit bureaus. The bureaus use this information to determine your credit score. Debit card activity, however, is not factored into your credit report.
3. Convenience. Carrying wads of cash, especially for big purchases, is not a smart idea. And getting to the bank to make cash withdrawals is not always convenient. Plus, some banks employ a 24-hour waiting period on large purchases made with debit. You should not have this problem with a credit card.
4. Budgeting. Some credit card companies categorize your purchases, and provide quarterly or annual summaries of your spending. These provide breakdowns of how much you spent on retail, dining, entertainment and other areas. You can import this data into personal finance tracking software to better evaluate where your money is going. Note, however, that these summaries often come long after the fact, so they should supplement ongoing budgeting.
5. Rewards. Many credit card issuers offer rewards for purchases on the card. These include cash back, airline miles, hotel credit, store discounts or points to spend on catalog purchases. Most of these cards have high interest rates, so they are only useful if you pay the balance in full, and on time, each month.
6. Safety. Fraudulent use of your debit card can result in money instantly gone from your bank account. It can take a while to recover this cash. In the meantime, you are liable for any bounced checks due to insufficient funds. Credit card companies, however, are getting better and better about detecting fraudulent charges quickly. If someone makes purchases with your account, your credit card company can usually resolve it with minimal effort on your part, and you will not be out any money.
7. Insurance. Most credit cards come with numerous consumer protections, such as rental car insurance and product warranties that extend the manufacturer's warranty. Credit cards also may provide additional protection if something you have bought is lost, damaged or stolen. Your credit card statement may be used as proof of a purchase if the original receipt is lost or stolen. In addition, if merchants fail to deliver on purchased services or goods, your credit card issuer can step in to help. They also can stop payment if necessary.
8. Emergencies. If your emergency fund is not as robust as you would like, your credit card can carry you through a short-term need, such as the ability to pay for an unexpected car repair. As always with credit cards, the key is to repay the balance as soon as possible, and not allow spending to mount up into an overwhelming debt.
9. Grace period. When you make a purchase with a debit card, the money is instantly withdrawn from your bank account. With a credit card, you may have up to 30 days during which your lender does not charge interest. This float or grace period can help you avoid paying interest on unexpected expenses, and allow you to repay the charge over two or three weeks.
Credit cards can serve as great tools for convenience. When not used correctly, however, they can become major financial burdens. Be sure to use your credit card as a tool to make your life easier, never as a tool to live beyond your means.
Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC providing comprehensive consumer credit advocacy and debt relief services. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.