Staying out of debt is a worthy goal. Often it is believed that the best way to do this is to stay away from credit cards completely (ala Dave Ramsey). Debit cards make this possible in today’s card oriented society, but in some ways, credit cards can still be a better choice, if used properly.
1. Cash Back and Rewards
Many credit cards offer a percentage of cash back on certain purchases. For example, one popular cash back card offers 5% cash back on all gas purchases and 1% cash back on all other purchases.
If the card is paid off monthly, so as not to accrue finance charges, this can really add up. Imagine if general monthly purchases were made with this type of card, and then paid off each month. Suppose a family of four spends $450 per month on groceries, $100 on dinners out, and $100 on incidentals. This is $650 per month. The cash back would be $6.50 per month, or $78 per year.
Add to that at least $100 per month for gas, which would be $5 per month or $60 per year. This is a total of $138 per year for doing nothing more than using the credit card for regular expenses, then paying it off each month. Other cards offer certain rewards for using their card. Some of these include points toward free airline tickets, hotel stays, and gift cards.
Save up enough points and there could be a free vacation or shopping spree in the future. Again, this only works if the card is paid off in a way that avoids as much interest as possible, but the benefits could really pay off in the long run.
2. Fraud Protection
Credit cards offer a certain degree of fraud protection. They usually have a fraud department that will contact a card owner if they notice purchasing activity outside of what they ordinarily see on the card. This could include several large purchases in a short period of time, or a singe purchase to a suspicious party. They ask the card holder to verify said purchases, and you will not be liable for fraudulent purchases. This is especially useful with the increase in internet shopping.
Most debit cards do not offer this protection or service, and once a fraudulent party spends money out of your checking account, it is gone. Many people use online payment methods that are attached to either a credit card or checking account, such as PayPal. The credit card fraud protection extends to this type of service as well, if the card is what the payment system is tied to.
If the system is tied to a checking account, once the money is gone it is gone. Even if it can be recovered, there is no money in the account for living expenses, bills, etc., in the mean time.
3. Warranty Benefits
Some credit cards offer warranty benefits on purchases made with them. This can be very useful with big ticket items such as appliances, ATV’s, lawnmowers, etc. Some of these even last up to two years after the manufacturer’s warrant expires. Often this can allow one to forego the manufacturer’s warranty, saving that extra expense.
Sometimes the warranties offered by credit cards are automatic, and sometimes they have to be applied for, depending on the card. Debit cards do not typically offer warranties.
4. Credit Building
Used correctly, credit cards can boost, or even build, credit. A part of a person’s credit score is based on their debt to credit ratio. If a person has a large amount of credit, but it is almost all used up, the ratio will be high. If they have a lot of credit, and most of it is available, this ratio will be low. The lower this ratio is the more positive effect it has on the credit score.
For example, a person with $1,000 total credit limit that has a $100 balance is going to have a very low debit to credit ratio that will increase their credit score. This can be a very effective tool in building and maintaining credit if used correctly.
5. Cash Protection
When using a debit card, one runs the risk of “blocking.” This refers to the practice of some retailers, including gas stations, and on a larger scale car rental companies and hotels, to “block off” a certain amount of money until a purchase clears the checking account. This can have devastating consequences if it takes awhile for the money to be released.
Gas stations may only hold $25 or so, but a car rental company or hotel may hold hundreds. This is money that appears to not be in you checking account, and can cause bounced checks or denied payments. Since a debit card subtracts money from your checking account immediately, if a cashier makes a mistake and enters the wrong amount, your account could have too much money taken out. It will eventually be corrected, but it might not be before something does not clear. This can cause fees that can add up, take even longer to correct, and only increase the problem.
With a debit card, you only have access to as much money as is in the associated checking account. This is the point, of course, when trying to stay out of debt. However, emergencies do happen, and access to a credit card can be priceless in certain emergency situations.
Use Credit Cards Responsibly
It is important to remember that the key to reaping the benefits offered by credit cards is to use them wisely. Always pay them off before interest accrues, if possible. Also, be sure to actually take advantage of the benefits that are offered. With all of this taken into account, credit cards can sometimes be a better, more effective financial tool than debit cards.
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Author Bio: Debbie is a personal finance writer and credit card expert. She contributes for a website with a tool to compare credit cards. When she is not researching various credit card tips she can usually be found trying her hand at being an “extreme couponer”!