There are a lot of strong emotions when it comes to credit cards. If you have spent time on the internet, chances are you have run across comments or forums of people swearing off credit cards. The reasons vary, but they generally have the same effect; spreading doubt. People are worried about falling into debt, and paying with cash or debit means you can’t go negative. Sometimes they even mention how the credit card companies exploit poor people. Are these worries justified, or will the reasoning lead to people making a huge financial mistake?
There are many different benefits that come with owning a credit card.
Cash Back Rewards
One of the most well known benefits of using a credit card is the cash back rewards. Typically, for every dollar you spend on certain categories, you will get 1-5% back for future purchases. The average consumer in the United States spends around $50,000 a year. Out of this spending, around 57% of it is spent with credit cards. If we assume that on average you get 2% back, the average person is missing out on $570 of rewards each year. In reality, this is more unbalanced cause there are people who don’t use credit cards at all. If you are spending $30,000 a year and aren’t getting 2% cash back, you are missing out on over $600 of free money. This should be reason enough to start using credit cards, but there are also many more reasons.
Fraud Protection and Tracking
This benefit is a bit more subtle, but almost all credit cards that you apply for come with consumer protections. If you go to a sketchy store and pay with cash and later discover the product is defective, you may be unable to return the product. If this happens, you are out of luck. With a credit card, you can contact the bank providing the card and file a claim which will probably get you a replacement or a refund.
Another upside to credit card purchases is you can view all of your purchases online. This makes it easy to budget and see where your money is going. This could be seen as a downside if you prefer to keep your purchases private, but most people don’t care if a company like Visa knows they paid $250 at the grocery store.
Short Term Interest Free Money
When you purchase something with a credit card, you can wait until your next payment to pay off the card. This means if you need to make a sizeable purchase even if your paycheck is a few weeks away. As long as you pay off the card before interest accumulates, there is no downside. However, you have to be careful from letting this get out of hand. If you are planning to pay off the card in a month, but that time comes around and you can’t pay the card off, then you are going to be charged interest.
Additional Perks and Rewards
Some cards come with additional perks. The Chase Sapphire Reserve Credit Card comes with complimentary airport lounge access, $300 of annual travel credit, TSA PreCheck, and several others (as of 2023). While these perks are nice, its important to keep in mind that these cards with perks often come with annual fees. In this example, the annual card fee is $550. When deciding on which credit card to get, think about how often you will use these perks to see if it’s worth it.
There are also many credit cards that come with sign up bonuses when you spend a certain amount. Many times these cards don’t even have annual fees. If you are in the market for a new credit card, shop around to see what kind of new bonuses you can find. For example, this Wells Fargo Card will give you $200 in rewards when you spend $1,000 in the first 3 months. This card comes with no annual fee, and almost everyone will spend $1,000 in a quarter. The $200 is pretty much free money, the only downside is that when applying for a new card you will end up with a hard inquiry on your credit report.
Building Credit
While the benefits above are all useful, the most important part of owning a credit card is building your credit score. Your credit score will determine you mortgage rate, car loan rates, and many others. If you have an excellent score you will save a ton of money in the long run. All you have to do to build your credit is to make your payments on time, and keep your balances reasonable.
Avoiding the Pitfalls of Card Ownership
In order to enjoy the benefits of card ownership, you have to avoid the pitfalls. Luckily, there aren’t many you have to worry about. You may know that credit cards have very high interest rates. Many people who have credit cards end up with crippling credit card debt that compounds out of control.
It is not unusual for a credit card to have 40% APR. This means that each year unpaid balances will increase 40% and you will owe more and more money. While the rate you get is affected by your credit score, it is still high either way. The way you can avoid this high interest rate is by paying your statement balance in full each month. The easy way to insure this happens is to set up an automatic monthly payment with the statement balance amount. You just have to make sure your bank account has enough money so you can avoid overdraft fees.
While sign up bonuses for cards can be attractive, you unfortunately can’t take advantage of them too often. Whenever you apply for a new line of credit, a hard inquiry will show up on your credit account. It is advised to keep the number of hard inquiries low, preferably less than 4 every 2 years. After applying for a new card your credit score will temporarily drop and make it harder to apply for more credit. You will also get worse rates and deals if you lose credit score points. Before applying for a large loan like a mortgage it is important to minimize hard inquiries on your credit report.
The Big Question: Are Credit Cards Unfair?
While the awards that come with a credit card are attractive, where does the money for these come from? Obviously when the card has an annual fee, some of the benefits will come from the money you are paying for the card. How does it work with cards you don’t pay for? The way credit card companies make money is by charging vendors a fee to let customers use their cards there. For example, if you are shopping at Walmart and pay $100.00 with your credit card, Walmart may be charged a 3% fee, or $3 in this case.
| Credit Card | Average Processing Fees |
| Visa | 1.15% + $0.05 to 2.40% + $0.10 |
| Mastercard | 1.15% + $0.05 to 2.50% + $0.10 |
| Discover | 1.35% + $0.05 to 2.40% + $0.10 |
| American Express | 1.43% + $0.10 to 3.30% + $0.10 |
These fees help pay for the cash back rewards that you get from using the card. However, credit card companies do make money off of people who do not pay off their card each month. If you make the minimum monthly payment, then the rest of the balance will accumulate interest. This minimum payment is the amount you need to pay to not affect your credit score, but you should only do minimum payments as a last resort so you can avoid the high interest rate.
It is also true that rich people are much less likely to accumulate interest. This is because they have enough money to pay off their balances each month. Poor people may also have less access to financial education leading them to make mistakes like not paying off their balances each month. Psychologically, credit cards can also prey on people since it does not feel like real money. When consumers pay with a credit card, you aren’t physically losing anything. Whereas when paying with cash you physically see bills go out of your possession. Even if you are financially savvy, make sure you are aware of this effect and stick to the budgets that you make. It is a very well demonstrated sociological phenomenon that people spend more when using credit cards than they do with cash.
What is right for you?
The large majority of people should get a credit card and start building their credit score as early as possible. If you have children, it may even be a good idea to give them a card in their name so they can start building their score too. Be careful to not recklessly spend with your cards, and keep track of where your money is going. If you don’t have the discipline to pay off your card each month, perhaps you are the rare individual who should not get a credit card. The goal is to use the cards to your advantage. Read the perks that come along with them and enjoy your cash back. Just be sure to avoid interest and don’t apply for new accounts too often.
The main lesson to take away is don’t be afraid of getting credit cards. They are incredibly powerful tools that you can use to give you a head start financially. Whether or not you like the credit score system we have, it’s one we are all stuck with. Best to use it to your advantage.
