Using credit cards as a tool in your financial toolbox.
Over 175 million Americans have at least one credit card. Between 2018 and 2020, it is estimated that Americans paid over $120 billion dollars in credit card interest, which is about $1,000 per year for each household. Not only are Americans paying exorbitant amounts of interest, but late fees also significantly impact credit card users. In 2019, 14 billion dollars of late fees were assessed. [1]
During the pandemic, credit card debt decreased, but it is on the rise once again. So how can you safely use a credit card, and without paying fees and interest? Should you?
Short answer: You can safely use a credit card and using one can have significant benefits. Those benefits might not be what you’d expect though.
While a credit card provides a way to make purchases without cash, to safely use a credit card, you should only use your credit card for purchases that you could otherwise pay for with cash. Additionally, your credit card should be paid in full, and on-time every month. Your credit card can be used for things already in your budget, but not things outside of your budget that you would not be able to otherwise pay for in that period. If your budget doesn’t account for a $1,000 television, you shouldn’t buy the $1,000 television with the credit card.
Other things to look out for so you don’t give out your hard-earned money:
Many credit cards have an annual fee. It is often between $95-$200. Since some credit cards offer services with no fees, there’s almost no reason to use these with a fee.
Credit cards tend to make us spend more than we would otherwise spend with cash. Why is this? With a credit card, we don’t have the same feeling of money leaving our pocket which causes “friction” and forces mindfulness around spending.
If a credit card seems like it will “pay” you to use it, be very cautious. If you are someone who struggles to pay your credit card bill on time and in full, the 2% cash back will not compare to the 14-22% interest and late fees the credit card is charging you. Cards that offer rewards programs tend to have higher interest rates to pay for the rewards programs.
On the note of rewards-type credit cards, if you are not someone who regularly tracks spending, deciding which type of rewards card to get might be challenging. If you get a rewards card that values spending money on fuel, but you hardly drive, it might not be worth it. Similarly, if a rewards card requires some amount of spending within the first few months but you don’t use a credit card enough to meet that minimum, it might not be a good card for you.
While airline cards might seem to help you take a “free” vacation, be mindful of the other costs associated with flying somewhere. There are always other expenses such as lodging, transportation, meals, and, if you’re anything like me, you just want to splurge a little extra on vacation! These airline cards might help defray the cost of a vacation, but if the rest of the vacation is not in the budget, flying there doesn’t help.
Keep track of your credit cards. Most Americans have an average of four credit cards. That’s a lot to keep up with! You are responsible for catching fraud on your cards, so know where they are physically and what is being spent on each one.
Credit cards seem to have strange billing cycles and due dates. For example, your statement might show that your billing cycle is from the 20th of one month through the 19th of the next month. The due date might fall at a time that is inconvenient with your pay. If you don’t like these dates, call the company and ask for it to be changed. Credit card companies want to keep you a customer, so if you are unhappy with something, give them a call.
There is one advantage of credit cards that should not go unnoticed. If you are using a credit card safely and adhering to all the points above, this reason is probably enough to encourage the use of a credit card: Credit cards are safer than debit cards.
If your credit card is stolen or lost, a credit card offers greater protection for the consumer than the protections afforded for a lost or stolen debit card. Let’s say your debit card is stolen and unbeknownst to you someone charges $2,000 worth of shoes to it. With a debit card, the loss is limited to $50 if the bank is notified within 2 business days. If the bank is notified of a loss between 3 and 59 days, you could be responsible for up to $500. If the bank is notified after 60 days, then you could be responsible for all the loss. However, if the same scenario occurs on your credit card, and you notify the credit card company within two days of the loss, you are not on the hook for any of it. If you notify the company after two days, you will be responsible for $50.
If you feel comfortable using a credit card, use it. Make sure it works for you. Regardless of what you choose to do, keeping track of your expenses regularly is vital. Tracking helps you stay on budget, away from pesky fees and interest, and confident that your hard earned money is not in someone else’s hands. With safe use, a credit card can be a great tool for the savvy financial consumer that you are!
[1] https://www.consumerfinance.gov/about-us/blog/americans-pay-120-billion-in-credit-card-interest-and-fees-each-year/#note2