The movement made sense at the time (to an extent) because so many people, thrown into a tailspin by the recession, were deeply in debt due to rampant spending. So it was logical — if not necessarily accurate — to vilify credit cards and to eschew them as soon as the debts were paid down.
But the thing is, credit cards aren’t evil; and they’re certainly not the enemy of good personal finance. Here are a few reasons credit cards are actual beneficial for your finances.
You’ve likely heard the statistic that 40% of Americans can’t cover a $400 emergency. At times like that, a credit card may be necessary to keep life on track. For example, if you can’t pay for your car repair, you might not be able to get to work, which means your finances will only spiral downward.
While it’s never great to charge something to your card that you can’t pay off immediately, it may be the best course of action. Keep the electricity on, keep your car running and keep food on the table.
Then there are people on the other side of the equation: those who believe that they have enough money that they don’t need a card. This troubles me.
There are a couple of scenarios here.
The first is that the person keeps thousands in a standard bank’s savings account. In this case, yes, then the person would have enough money to cover many (though perhaps not all) emergencies. But this situation results in a huge opportunity cost since an online bank could provide significantly more interest.
A credit card would allow the savings to be kept in an online account, earning better interest rates, while letting the person pay promptly for any unexpected expense.
The second scenario is that the person does have the funds stowed in an online bank. Which is great for interest rates, but it means there will be a one- to three-day lag in getting access to the money. That could be a problem.
What if a major, expensive repair were suddenly needed? Some things can’t be put off while you wait for fund transfers — for example, a broken water main, a sewer line clogged with tree roots (this happened to my aunt) or a non-working car. In these cases, a credit card would let the person pay for the necessary repairs without a lag on having running water, using the toilet or getting to work. The card could be promptly paid off once the funds transferred into the main account.
Either way, even people with “enough” money should consider having a credit card to allow for more flexibility in both banking and payments.
Avoid worse debt
Having a card for emergencies will also keep you away from more toxic, cyclical types of debt such as payday or auto title loans.
Once you get a payday loan, you have even less money when your paycheck comes, making you more likely to run out of money sooner, thereby increasing the odds that you’ll go back and get a new payday loan. Similarly, auto title loans are rarely a one-time thing. In fact the majority of auto title loan borrowers end up renewing the loans, according to a NerdWallet article.
Remember, if anything goes wrong with a card, you can make a smaller payment; if anything goes wrong with an auto title loan, you lose your car. (And according to that NerdWallet piece, about 20% of the single-payment title loan borrowers do.)
Not to mention that, as heinous as it seems to pay double-digit credit card interest, car title and payday loans are significantly worse. Car title loans generally have rates of more than 250%, and payday loans rates can be as high as 1,000%.
In short, if you’re going to need money — and can’t get it from friends or family — it’s better to owe a credit card company than a payday loan or auto title loan business.
Without a credit card, you’re simply missing out. Used carefully, rewards cards are a great way to benefit from routine purchases.
We actually charge everything to the card, making weekly payments to keep the bill under control. In the past three years alone, rewards cards have netted us thousands of dollars in travel rewards, and in just the past eight months we’ve gotten more than $700 in cash back.
Why purposefully miss out on those benefits?
Despite what some people say, a credit score is just about essential these days.
It’s incredibly difficult to rent an apartment with bad or no credit, and even if you do get the place, you’ll almost inevitably have to provide a larger deposit. It’s also hard to get loans with poor credit (or none at all), and any that you do get will have high interest rates.
Don’t forget that some employers even run credit checks these days. Imagine having a lack of a credit usage hurt your employment prospects!
Of course, some people insist that you don’t need loans because you can just pay in cash. But most people don’t have the option of saving tens of thousands of dollars for a car, let alone hundreds of thousands for a house.
Even if you do have that ability, you still can’t predict all of life’s little wrinkles. What happens if you get a serious illness that drains the coffers? Or are involved in a lawsuit and have to pay damages? What if your car is totaled or you have a fire and insurance takes a while to pay out? Will you have enough?
In short, there’s always a chance that you’ll need a loan at some point, and without a credit score, you’re likely going to get a bad deal. So it’s best to build at least a little credit history, even if it’s just with one card. There are even credit cards out there for people with bad credit scores or no credit scores at all.
To sum up
Credit cards can protect you in cases of emergencies, will help keep you away from more predatory cycles of lending and can even benefit you with flights, hotel stays, rental cars or straight-up cash. It’s hard to argue with that, right?
Are there other ways that credit cards help your finances? Do you avoid using credit cards, or do you see the benefits of having a card?