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The statistics around credit cards and how Americans use them are alarming, to say the least. Let me start by sharing a few of them found in a recent CNBC article:
- The average American has a credit card balance of $4,293, according to the latest Experian data.
- Total credit card debt is also at its highest point ever, surpassing $1 trillion, the Federal Reserve found.
- 1 in 3 people — or 86 million Americans — said they’re afraid they’ll max out their credit card when making a large purchase, according to a WalletHub credit cards survey.
- Credit card interest rates have never been higher with the average card interest rate at 17.41% percent, according to CreditCards.com’s latest report.
Based on those numbers, it’s no wonder that many people believe there is wisdom in steering clear of credit cards. I believe that is short-sighted because there are actually many advantages of using credit cards. I will give one caveat, however. If you do not have a working budget, then you should not utilize credit cards because they should never be used to make up the difference in a budget. And credit cards should certainly never to be used as an emergency fund.
Below are 7 advantages of credit cards that outweigh the disadvantages.
- Earning Rewards. With the right credit cards, you can earn cash back, travel rewards, or both. This is free money that you can earn simply by running your expenses through your credit card. Now, the card companies will want you to run into issues where you don’t pay your bill or pay it late as that is how they make money. Play your cards right, and they will be funding your next vacation.
- For Emergencies. I know I said to never use credit cards for emergencies and I meant it. When I recommend having a credit card for emergencies, it is ONLY to help give you time to transfer money from a high yield savings account (where you should keep your money) to your main bank account to immediately pay off the card. I DO NOT encourage people to look at a credit card as any form of an emergency fund. Sometimes they are pitched that way, but it is a trap and one that so many people find hard to get out of once they get in.
- To Build Your Credit. For those who have suffered damage to their credit, getting a secured credit card can be a great way to rebuild credit by showing that you have the discipline to not overspend. In this arrangement, you would send a check into the bank in the amount of the credit line that you want for your credit card. I recommend never charging over 30% of the credit limit, and always paying the balance off every month (whether it is a secured credit card or not). Over time, the credit card company will usually eventually convert the account to a non secured account and send you your deposit back.
- Reduce Financial Losses. Those who advocate for “cutting up credit cards” in favor of using cash or debit cards might find themselves suffering greater financial losses. Whether it’s a product purchase gone wrong, or outright fraud, having extra money taken out of your bank account is not something that most people budget for. If you use a credit card, not only is your liability limited in most cases, but your budget is not impacted by money actually coming out of your bank account until the issue is resolved. If you shop online this is even more important because there is more potential for fraud when using your credit card online due to the high percentage of data breaches.
- Purchase Protection. Some credit cards offer additional insurance for loss, damage, or theft of items that you purchase.
- Travel Benefits. If you are a frequent traveler, I recommend seeking out a credit card that offers travel insurance. There is a wide range of travel insurance options that can be offered including trip cancelation insurance, additional rental car coverage, accident protection, and even lost baggage insurance. Not surprisingly, cards offering higher levels of protection often have higher annual fees associated with them, so you need to factor that in. If you are not a big traveler, then you can probably find a lower priced credit card.Another travel benefit is the ability to use your credit card for security deposits. It can put a damper on your available funds if you use a debit card as security to rent a car as this will put a hold on a certain portion of your funds until your trip is over.
- For Buying Reimbursable Items. Some people have jobs where they end up paying for expenses for which they are reimbursed. Buying these with a credit card is a great way to make this happen without impacting your budget. The extra added bonus is that you can earn rewards on those purchases as well.
Hopefully, this leaves you with a new perspective on how to effectively use credit cards.
If you have used a credit card and had a specific perk not mentioned, feel free to share it in the comments.