You Need a Credit Card, But Only if You Don’t Need a Credit Card

Full disclosure: I work for a bank that issues credit cards. I won’t name the bank (some of you may know) so this is not misconstrued as a solicitation of business.

I think the way the average person thinks about credit cards is wrong. In my personal and professional life, I mostly see two kinds of people: the person who has an aversion to credit cards because they don’t like additional debt — and the person who has a credit card but who only uses it for emergencies (or big purchases they want to pay for over time).

While there is some validity to both strategies — credit card debt CAN spiral out of control — sometimes an emergency purchase does require immediate funds — steadfast adherence to either strategy comes with major opportunity cost. I’ll give two examples:

1) Unlike most debit cards, credit cards reward good behavior and consistent usage. Put another way, you can earn while you spend. There are credit cards with no annual fee that reward you for purchases you would make regardless: groceries, gas, travel, dining, etc. I’ll put a link to BankRate’s “Best Credit Cards with No Annual Fee” article here to prove this is not a direct solicitation of business from my employer.

There are cash back offers, points offers, travel offers, and most cards come with a promotional offer that allows for x months interest free or a lump sum of points for spending x number of dollars in a certain period.

2) Credit cards provide a level of fraud protection debit cards do not provide. This is pretty straightforward. Everyone reading this has been the victim of card fraud in the past. If you haven’t you know someone who has. Our ever-more technologically dependent world makes it nearly impossible to avoid. We all shop online, save our card information in our phones and on our favorite merchants’ websites. Doing those things creates risk we cannot control.

If (when) your card is compromised and fraudulent transactions occur, it makes sense that you don’t want to lose the money in your checking account. That’s your money. You worked for your money. Most financial institutions are really good about investigating fraud and providing a resolution, but that process takes time. You could theoretically be without a large chunk of your paycheck for a couple of weeks while the transaction is investigated. You could be forced to wait on a replacement debit card for 5–7 business days while it travels through the postal service.

If your credit card is compromised, you don’t lose your money. That is unused money the bank loaned to you. While the fraudulent transaction is being processed, your actual money is not being held up. Your checking account is whole throughout the process.

Now, there are obvious risks with credit cards. Interest rates are often punitive and cumbersome (15–25% or so), and the credit card issuer often does not make you pay your balance back in set payments. They’ll allow you make minimum payments until you’re old and gray, and if the balance is high enough, you’ll never make a dent. For example: a $5,000 credit card balance with an interest rate of 18% would typically have a minimum payment requirement of $125 (1% of balance plus interest). Assuming you only made the minimum payment each month, it would take 22 years and 9 months to pay the balance. You would pay $6,923.09 in interest over that time.

Do not use a credit card if you do not have the funds to pay it off completely in the same billing cycle.

I’ll repeat: do not use your credit card as a loan to yourself. It’s the most expensive type of loan you can take, with no fixed payments and no fixed term. Don’t play this game with your finances. Don’t play this game with the bank.

Let the bank work for you, stop working for the bank.

Beat the bank at its own game. Allow them to reward you with points and travel and promotional offers: and then pay the card off each month without paying a dime in interest. Use your credit card as a debit card (paying the card off immediately) and reap the benefits on the card issuer’s dime.

It takes focus, commitment, strict budgeting, and scrutinizing your bank and credit card statements each month, but anyone can do it.